What are Financial Statements?

Financial statements are formal records prepared by accountants to summarize an organization’s financial performance and position over a specific period.

They provide a clear summary of how money flows in and out of the business, helping owners, investors, and other stakeholders understand its performance.

Accounting firms use these reports to provide clients with accurate insights into profitability, liquidity, and overall financial health, as well as to meet compliance and reporting requirements.

Purpose of Financial Statements

The purpose of a financial statement is to provide a clear and accurate picture of an organization’s financial performance. For accounting firms, the goal is to present reliable information that helps clients, investors, regulators, and other stakeholders make informed financial decisions.

Financial statements achieve this by assessing performance, for starters, revealing how profitable and efficient a business has been, detailing income, expenses, and net results over time.

They evaluate financial position by showing what a company owns, owes, and how much equity it holds, which helps assess its stability and solvency.

Beyond tracking past performance, financial statements also support decision-making for the future by giving managers and stakeholders the data they need for budgeting, investment planning, and strategic growth.

They also ensure compliance with statutory and regulatory requirements for financial reporting, audits, and taxation.

Additionally, they foster transparency and trust by demonstrating the integrity of a business's financial practices, which builds confidence among investors, lenders, and other stakeholders.

How Do Financial Statements Work?

The process of creating financial statements includes collecting, organizing, and summarizing all of a business’s financial data into standardized reports that show how money flows through the organization and what its financial position is at a specific point in time.

Accounting firms prepare these statements by following structured accounting principles (such as IFRS or GAAP), ensuring that every transaction is accurately recorded and classified.

The process begins with bookkeeping; recording daily transactions like sales, purchases, payments, and receipts. These entries are then sent to the general ledger, where they’re grouped into accounts such as assets, liabilities, income, and expenses.

At the end of an accounting period, these accounts are reviewed and adjusted for items like depreciation, accrued income, or unpaid expenses.

Once everything is accurate, the data is used to prepare the main types of financial statements we’ve explained below.

Types of Financial Statements

1. Income Statement (Profit and Loss Statement)

The income statement shows a company’s financial performance over a specific period; usually a month, quarter, or year. It details all revenues (income earned) and expenses (costs incurred) to calculate the net profit or loss.

The income statement includes several key components that work together to show profitability. It starts with revenue, which is the money earned from sales or services.

From this, the cost of goods sold (COGS), the direct costs of producing goods or services, is subtracted to calculate gross profit.

Operating expenses such as salaries, rent, utilities, and marketing are then deducted from gross profit.

Finally, after accounting for all expenses, taxes, and interest, the statement shows the net profit or loss, which represents the company's bottom line for the period.

The income statement helps measure profitability and efficiency. Accounting firms analyze it to identify trends in revenue and expenses, assess performance against budgets, and provide insights for improving profitability or controlling costs.

2. Balance Sheet (Statement of Financial Position)

The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It shows what the company owns (assets), owes (liabilities), and the value belonging to its owners (equity).

It follows the fundamental accounting equation:

Assets = Liabilities + Equity

The balance sheet is built from three key components:

Assets represent what the company owns, including current assets like cash, accounts receivable, and inventory, as well as non-current assets such as property, equipment, and long-term investments.

Liabilities are what the company owes to others, divided into current liabilities like accounts payable and short-term debt, and long-term liabilities such as loans and mortgages.

Equity represents the owner's or shareholders' stake in the business, which includes retained earnings and any capital contributions made to the company.

The balance sheet helps evaluate a company’s solvency and stability. Accounting firms use it to assess liquidity ratios, debt levels, and working capital, which are vital for determining financial health, risk, and creditworthiness.

3. Cash Flow Statement

The cash flow statement tracks the actual movement of cash in and out of the business during a specific period. It shows whether a company generates enough cash to meet its obligations and invest in growth.

The cash flow statement is divided into three sections that track different types of cash movement. Operating activities capture cash from the core business, including receipts from customers, payments to suppliers, wages, and taxes.

Investing activities show cash used for buying or selling long-term assets such as equipment, property, or investments, and financing activities reflect cash from borrowing, repaying loans, issuing shares, or paying dividends.

Even a profitable business can run into trouble if it lacks cash. The cash flow statement helps accounting firms and clients understand liquidity, plan for future cash needs, and manage short-term funding more effectively.

4. Statement of Changes in Equity

The statement of changes in equity (or statement of retained earnings) explains how the owners’ or shareholders’ equity has changed over the reporting period.

It links the income statement and balance sheet by showing how profits, losses, dividends, and capital contributions affect equity.

The statement of changes in equity includes several key components that work together to show how ownership value evolves over time.

It begins with the opening equity balance, which is the equity value at the start of the period.

Throughout the period, equity can increase through additions such as net profit earned by the business or new capital contributed by owners or shareholders.

Conversely, equity can decrease through deductions like dividends paid to shareholders, withdrawals made by owners, or losses incurred during the period.

The statement concludes with the closing equity balance, which reflects the total equity at the end of the reporting period after accounting for all these changes.

This statement provides transparency in how the company’s equity evolves. For accounting firms, it’s an important document when auditing or preparing reports, as it shows whether profits are reinvested or distributed and ensures all changes are accurately reflected in the balance sheet.

Best Software for Financial Statements

Using accounting software can significantly simplify the process of preparing financial statements by automating routine tasks, improving accuracy, and ensuring data is always up to date.

Eleven takes this a step further by providing advanced tools for reconciliation, categorization, and reporting, making the entire process faster, more consistent, and more reliable.

• Accurate Transaction Categorization

Eleven automatically categorizes imported transactions into income, expenses, assets, and liabilities, creating a precise trial balance and general ledger.

Accountants can review and approve entries easily, ensuring the financial statements are built on accurate data.

• Smart Bank Reconciliation

With Eleven’s smart reconciliation tools, every transaction in your records matches the bank data.

The platform automatically suggests matches and flags discrepancies, guaranteeing that cash balances are correct before statements are finalized.

• Real-Time Financial Insights

Eleven can generate real-time reports and draft financial statements at any point in the accounting period. Firms can instantly view up-to-date income statements, balance sheets, and cash flow reports, allowing you to be proactive in your financial management and give your clients well-informed advice.

• Consistency, Compliance, and Accuracy

Because Eleven keeps records synchronized and automatically applies accounting rules, it reduces inconsistencies between ledgers and reports. Firms can produce financial statements that comply with standard accounting frameworks such as IFRS or GAAP, with confidence that the underlying data is complete and verified.

• Collaborative Review and Adjustments

Accountants and clients can work from the same data set, making real-time adjustments for accruals, depreciation, or reclassifications. Every update automatically flows through to the financial statements, removing version control issues and ensuring the final reports reflect the most current figures.

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