The four financial statements

An introduction to the four financial statements

There are four financial statements that make up your budget. Your statements can include different accounts based on the type and size of your business, but they generally follow the same structure.

Income statement

The purpose of the income statement is to measure your company’s profitability over a period of time.

$$\text{Net income (profit)} = \text{revenue} - \text{expenses} +\text{ gains} - \text{losses}$$

Balance sheet

The purpose of the balance sheet is to measure what your company owns (assets) and how it paid for its assets (liabilities + equity) at a given point in time.

$$\text{Assets} = \text{liabilities} + \text{equity}$$

Cash flow

The purpose of the cash flow statement is to measure your cash inflows and outflows from operating, investing, and financing activities over a period of time.

$$\text{Cash change} = \text{cash}_\text{from operations}+\text{cash}_\text{from investing}+\text{cash}_\text{from financing}$$

Retained earnings

The purpose of the retained earnings statement is to measure your accumulated profit for all historical periods that have been reinvested into the company rather than paid out to your owners.

$$\text{Retained earnings} = \text{net income} - \text{dividends}+\text{retained earnings last period}$$

Francis includes a library full of templates based on the financial statements that you can easily modify and link to your accounting tool.