Links between the statements

A brief summary of how the financial statements are connected

Your four financial statements are linked so that both sides of the balance sheet equation should always match. The value of assets should always be equal to the value of liabilities and shareholder's equity.

The way it works is that the balance sheet includes two accounts,

• cash (can be found under "assets")

• retained earnings (can be found under "shareholder's equity")

that reconcile the financial statements.

The double-entry principle means transactions should be categorized in two separate entries across the financial statements.

The separate cash flow and retained earnings statements calculate your cash and retained earnings accounts. These two values draw on information from the income statement and balance sheet statement.

Because transactions are always entered in two separate places, this mechanism will ensure that the balance sheet equation matches.

The following illustration shows how the statements are linked together. The specific accounts may vary.

You only need to forecast the income statement and the balance sheet. The cash flow statement and retained earnings statement are derived from those two.

Cash flows and retained earnings calculations are derived from the income statement and the balance sheet. The cash flow statement adjusts cash flow estimates based on differences in the holdings on the balance sheet. The only new item is "Dividends paid out" in the retained earnings calculation, which is not included in the income statement.

Examples of how transactions affect your numbers across the financial statements

It can be helpful to think about how changes in accounts will affect your numbers.