5 The main financial statements
To summarise from the previous discussions, the financial statements comprise:
The income statement or profit and loss statement, which shows income, less costs/expenses for an accounting period. Where income exceeds expenses, a profit or surplus arises. Where costs/expenses exceed income, a loss or deficit arises.
The balance sheet, which is a ‘snapshot’ of assets and liabilities at a moment in time – the end of the accounting period. The end of the accounting period is also often referred to as the ‘accounting reference date’, ‘balance sheet date’ or ‘closing date’.
To the above, we must also add:
The cash flow statement . There is a requirement for certain business entities, namely companies, to provide a cash flow statement to show movements in cash over the period covered by the income statement. This cash flow statement is considered by entities required to provide it as a third financial statement in addition to the income statement and balance sheet. The cash flow statement will be discussed later in this course when you learn about company financial statements, and examples will be given there.
If you look at any income statement and/or balance sheet for an entity, you will find that they are generally accompanied by a set of notes to the financial statements which provide further information, explanation or analyses, which are more conveniently shown separately from the main statements.
‘Profit’ and ‘cash’ are not the same thing, although profit commonly becomes cash in time. It is important for a business to generate both – profit to stay in business in the longer term and cash to be able to pay bills and liabilities as they fall due.