The Three Basic Financial Statements

October kicks off the 12th year Basis 365 Accounting has been in business.

We’ve helped many small business owners since 2012, and one thing is clear: many don’t have a good pulse on their business. There are many reasons for this, but one that pops up is that they don’t grasp the accounting and financial reporting fundamentals.

Running a business presents many challenges, and accounting is often the last thing on their minds.

That’s okay.

I assure you that Rhett Molitor, CPA (inactive), my co-founder, and I don’t think about accounting for our business that often. But when we do, it just clicks together (like Lego blocks) because we know the fundamentals.

I want to change that for you, the small business owner, and walk through the fundamentals of accounting and financial reporting.

“UGH. That doesn’t sound fun, Mike.”

You’re right—like I said, Rhett and I?don’t think accounting unless we have to, but we’ve built the muscle and can flip on the switch quickly.

Like building muscles, we can take one part at a time. I’ll keep it nice and easy, and jargon-free, so grab your afternoon coffee, sit back, and absorb.

For this week’s chunk, we’ll start at the top and work our way down to the details over the course of weeks. Here we go…

Financial statements provide a clear picture of a company’s financial health. There are three primary financial statements:

1. Profit and Loss (sometimes called an Income Statement)
2. Balance Sheet
3. Cash Flow Statement

Most people know about the Profit and Loss but don’t consider the Balance Sheet or Cash Flow. The three are related. You can’t have one without the other.

Here’s a quick definition of each:

• The income statement measures a company’s financial performance over a period of time.
• The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time.
• The statement of cash flows provides a detailed account of the company’s cash inflows and outflows over a period of time.

These three financial statements are related. Changes in one statement may affect changes in the others. The key takeaway is don’t review the income statement, balance sheet, and cash flow separately. They need to be reviewed together.

That’s it for this week. Like I said, small bites. Nice and easy.