Financial statements are documents that outline relevant financial information about an entity. Note that this entity can be an individual, a business organization, a nonprofit organization, or a government agency. It is essentially a formal record of financial activities and financial position.
There are four basic types of financial statements. These are the balance sheet, income statement, statement of cash flow, and statement of retained earnings. This article enumerates, defines, and differentiates these different types of financial statements.
The Four Basic Types of a Financial Statements
Balance Sheet vs. Income Statement vs. Cash Flow Statement vs. Statement of Retained Earnings: Definitions and Differences
1. Balance Sheet
A balance sheet or a statement of financial position represents a snapshot of the financial standing of an entity based on a specific date and at a particular time by providing information about its assets, liabilities, and/or equity. It also provides information on how assets are financed, whether through debt or equity, and whether with short-term capital or long-term capital. This document essentially shows what an organization owns, how much it owes, and the amount of investments of owners.
2. Income Statement
An income statement, also called a profit and loss statement, captures the results of an operation during a specified length of time, such as within a year, quarter, or month. It simply reports the generated income or revenues and the incurred expenses, thus providing information about the generated profits as well. Consider it as a financial scorecard for a specific period that tracks income and expenses to reveal how profit by indicating how much money came in and how much went out. This type of financial statement is also known as a statement of comprehensive income, a statement of revenue and expense, or a profit and loss report.
3. Statement of Cash Flow
A statement of cash flow or a cash flow statement reports the cash flow activities, specifically the operating, financing, and investing activities. It represents investment decisions or uses of cash and financing decisions or sources of cash. This document also illustrates how cash flow activities have impacted the cash position of the organization during a specified period. It fundamentally tracks the movement of cash and reveals how investments, funding, and daily operations affect cash on hand.
4. Statement of Retained Earnings
A statement of retained earnings represents the changes in the common equity account between balance sheet dates. Equity is determined based on the difference between assets and liabilities. This type of financial statement is also called as a statement of changes in owner’s equity under a sole proprietorship, a statement of changes in partners’ equity under a partnership, including general partnerships and limited liability partnerships, and a statement of changes in shareholders’ equity under a corporation. It is also known as a statement of taxpayers’ equity when used by a government organization.
