accounting

How to Read Financial Statements

By Dana Sadarangani



I constantly have clients that do not understand what accountants do and how they are saving the company money. The truth is, accounting has become such a necessity to businesses that accountants have stopped bothering to answer the question. However, I am not like that; I want to make sure to explain what is needed in running a smooth financial book for your company.

 

Back Story:

I had a client that I sent financial statements to every month. They never once bothered to open the attachment. They made their decisions based on the information I told them. Later, I learned he never opened the attachments. Not because he did not want to; but because he did not know what he was reading. He relied heavily on what I was advising him and relying on an application for his point of sale system, Square Up. He did not bother to read the expenses portion and did not understand the bottom line. Eventually, I taught him how to read his financials. He learned that his business expenses decreased, and his business made more money.

 

What is a Financial Statement?

 

A company’s financial statement is used to show a company’s performance over a certain period. Many larger companies look at this every fiscal quarter. Smaller businesses should be looking at their financial statement monthly. The components of the financial statements are the income statement, balance sheet and the statement of cash flow.

 

By being able to read a financial statement, you can determine whether a company has made or lost money, where the money went and where the company stands financially.

 

Income Statements

Income statements are also known as the Profit and Loss Statement or the P&L for short. This shows how much sales there were and the cost to acquire those sales. The Profit and Loss Statement also shows the company's bottom line after sales made minus all the cost taken. This is what you use to record and see all activities of the company.


Balance Sheets

What is the first rule of accounting?

It isn’t that we don’t talk about accounting, although sometimes it seems like it.

 It is:

 

ASSETS = LIABILITY + STOCK HOLDER EQUITY

The assets, liabilities and the shareholder equity of the company are everything that has happened to date.

 

Assets are all the property the company owns: cash in bank accounts, real estate, machinery, trademark and patents.

Liabilities is money the company owes others. This includes leases, loans, employee payroll, payments to suppliers of material, tax liabilities, obligations on non-delivered products and delivered products.

Shareholder equity represents the company's net worth if it were liquidated and what each shareholder would receive after paying the creditors of the company.

 

Statement of Cash Flow

The Statement of Cash Flow reports on money in and money out. It is divided into financing, operating activities, and investment activities. These categories show the change of money.

 

 

With Accounting Your Life, we can help train you on these elements and more, depending on your needs from hiring us. Reading Statements is one the fundamentals of business. If you need help, want to learn more or if you want to decipher your statements, feel free to contact Accounting Your Life.

G E TM O R E from your financial statement. Reading a financial statement gives you full control of your books. It gives you a clear picture of the financial position of a business. Past performances helps in reading the changes the companies can and should make, which in turn helps the business grow and succeed.

Photo by M. B. M. on Unsplash