As your business grows, it’s sensible to keep your finger on the pulse of money coming in and out, and consistent financial statements help you do this. This financial statement guide will introduce some essential bookkeeping and accounting principles to help you understand the different kinds of statements and their purposes.
A financial statement is a document which describes the ‘health' of your business’s current financial position regarding assets, liabilities and equity. They are useful for business owners to understand risks and are also used by investors who want to assess a company’s condition. There are various types of financial statement, each of which has a different purpose.
Financial statements were traditionally created manually using pen and paper or spreadsheets, but modern businesses increasingly use accounting software to quickly create reports and eliminate mistakes.
In this guide, we’re going to explore three essential kinds of financial statements:
Sage Accounting Software helps you monitor and keep track of your cash position, allowing you to focus on what matters the most to you.
A balance sheet gives you a detailed breakdown of all your current assets (cash, goods you hold), liabilities (debt, salaries to pay) and equity (how much the business owner and investors hold in the business). It’s a highly useful form of financial accounting, as once the sum of equity and liabilities are subtracted from your assets, the remaining number tells you your business’s current value.
There are various ways you can format a balance sheet, but the most common approach is to use a ‘classified balance sheet’ where different subcategories of accounts are consolidated for ease of understanding. Below is a typical balance sheet format:
| Assets | Value |
| Cash | 20,000 RM |
| Equipment | 10,000 RM |
| Inventory | 50,000 RM |
| Petty cash | 100 RM |
| Total assets | 80,100 RM |
| Liabilities | Value |
| Tax | 10,000 RM |
| Loans | 20,000 RM |
| Accounts payable | 5,000 RM |
| Wages payable | 15,000 RM |
| Total liabilities | 50,000 RM |
| Equity | Value |
| Retained earnings | 25,000 RM |
| Total Equity | 25,000 RM |
Balance sheets and trial balance sheets have similar names, yet have different accounting purposes.
A trial balance sheet is an internal way of ensuring your account books add up. To create the trial balance, you just need to add up all the credits and debits on your different accounts, and this should add up to the same amount for both. If there is a discrepancy between credits and debits, you now know that there has been an error in your accounting.
A trial balance sheet is not intended for ‘public consumption' — instead, it's used by your accounting team to make sure that they are preparing other financial statements correctly and will be updated daily if not more often. On the other hand, a balance sheet is meant to be read by outsiders and is typically published at regular intervals— usually quarterly.
Trial balance
18 April 2018
| Account name | Debit RM | Credit RM |
| Cash | 100,000 | |
| Equipment | 30,000 | |
| Bank loan | 30,000 | |
| Accounts payable | 20,000 | |
| Salaries | 100,000 | |
| Utilities | 20,000 | |
| Total | 150,000 RM | 150,000 RM |
A profit and loss statement (also known as P&L Statement, income statement or statement of operations) shows you the revenues, costs and expenses the business has incurred over a specific period— usually quarterly or yearly. By subtracting costs and expenses from revenue, you can judge the company’s ability to generate a profit.
Fundamentally, a P&L statement shows a company’s net income over a period and can show you whether this is going up or down. By contrast, a balance sheet gives you a snapshot of what a business is worth at any one time.
Keeping an eye on your profit and loss statement helps you stay on top of your cashflow and give you warning signs as to whether the business is in trouble. It’s worthwhile entering information into your profit and loss statement the moment you receive — or spend — money. Online accounting tools allow you to do this any time, anywhere.
Here is a standard profit and loss statement template:
Tam’s Fruit Stall
Profit and Loss Statement
Q1 2018
| Revenues | Value | Total |
| Fruit sales | 10,000 RM | |
| Revenues total | 10,000 RM |
| Expenses | ||
| Rent | 5,000 RM | |
| Tax | 2,000 RM | 10,000 RM |
| Transportation | 1,000 RM | |
| Expenses total | 8,000 RM | |
| Net income | 2,000 RM |
Creating financial statements for your business is essential for making sure that your foundations are stable, while also helping you detect any risks on the horizon. And it’s easier than ever to create financial statements. Sage Software takes on all the heavy lifting of creating financial statements, letting you focus your energy on growing your business.