Financial statements are accounting reports that summarize a business’s activities over a period of time, in other words, financial statements give business investors, lenders and creditors the idea of the company’s financial health. Financial statements include:
Balance sheet: This tells you about the assets you have and liabilities (debt) you owe at a particular point in time. It’s the summary of what a company owns and owes at the end of the year. Balance sheets are broken up into 3
- Assets
- Liabilities
- Equity
Asset is anything valuable that a company owns. It’s a present economic resource controlled by the entity as a result of past events. They include physical properties like buildings as well as monetary possessions like cash and receivables.
Liabilities are debt a company owes to people. They’re present obligation resulting from past transactions or events, they are source of third-party funding that a company uses to buy assets and fund operations.
Equity: can simply be defined as the amount of assets remaining in the business after subtracting its liabilities.
Core principle of understanding financial statements.
What a business owns (assets = what a business owes (liabilities) + equity (shareholders equity) this is known as the accounting equation. The = sign makes us understand that the business assets always have the balance with its liabilities and equity. When you look at the accounting equation at a single point in time then we are looking at balance sheet.
Capital contribution is the money the owners of the company take out of their pockets and invest into a business in exchange for a share of equity, e.g. if a company sells shares and you buy one then you have made a capital contribution and that automatically makes you a shareholder and a part owner of the business.
Retained earnings are earnings accumulated that the business is holding on to for future use. This basically means what is left of profit after that the business has taken away what has been withdrawn by the owners. Retained earnings are made up of opening retained earning which is last years retained earning carried forward into the start of this year, plus current year’s profit which is the difference between revenues and expenses minus current year withdrawals. The profit distribution to the shareholders of the business is called dividends. Retained earnings is the key that links together two of the most important statements-the income statement and the balance sheet.
The income statement summarizes a business’s revenues and expenses over a period of time. The profit a company makes in the year is also known as the profit or loss statement; it always covers a period of time. Revenue − Expenses= Net income .
Chinyere Ifegwu
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