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The 3 Critical Financial Statements

There are three vital statements forsame frequency as the Profit and Loss and
understanding the condition of a business orusually reflect the business on the last day
entity: (1) the Profit and Loss Statement,of  the  Profit  and  Loss  period.
(2) the Balance Sheet and (3) the Sources and
Uses Statement. Each of them provides aFinally, the Sources and Uses Statement
different perspective of how an entity isreveals how the business received and used
operating. Combined, they show examiners thefunds during the statement period. It shows
health of the business. Each statementhow much money was provided by business
reflects a different perspective on theoperations and how much was provided by loans
business'  financial  operations.or capital received by the entity. The
statement also summarizes how the funds were
The first statement, the Profit and Loss, canused by the entity. It demonstrates if the
also be called the Income Statement. Itcompany is healthy, headed for trouble, or
documents the amount of money coming into thejust bouncing along. Like the Profit and
entity (the income) and the money going outLoss, this statement covers only the period
of the entity (the expenses). The differenceshown in the statement heading. It says
between what comes in and what goes out isnothing about any period not included in the
the Net Income, if there is more money comingstatement. Again, the statement usually
in than going out. If not, there is a Netcovers the same period as the Profit and
Loss. The statement covers a specificLoss.
period, which is shown in the heading of the
statement. Note that it tells us nothingTaking these three statements together, there
about what has happened for any date that isis a present picture of the business. From
not included by the statement dates. Thinkthe Profit and Loss, comes how well it did
of it as a snapshot for the specific timeduring the period, a short-term perspective.
period. Some common snapshot periods areFrom the Balance Sheet it is seen how the
monthly,  quarterly  and  yearly  ones.entity is accumulating assets or liabilities,
from a long-term perspective. Finally, the
The second statement, the Balance Sheet,Sources and Uses statement demonstrates where
covers the condition of the business from theand how efficiently the entity resources were
time it began until the ending date on theused during the period. All three
statement. The Balance Sheet reveals threeperspectives are important to the entity
important business characteristics: (1) itoverview.
summarizes the assets owned by the entity
(e.g., buildings, bank accounts, inventory,To an investor or owner the statements answer
etc.); (2) the entity liabilities (e.g.,three questions about the entity. Did the
loans, outstanding bills, etc.); and (3) theentity make a profit? Did the entity
business owners' equity. The statement isincrease the owners' equity? And finally,
arranged in what is called the 'accountingwere entity assets used efficiently? From
equation', which indicates total Assets willthe overviews in these three statements,
equal the sum of Liabilities and Equity.further questions might be formulated in
Balance Sheets are commonly issued at thespecific areas.



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