Financial Statements

Understanding the Basics of Financial Statements

Financial statements are a way of showing a company's financial position and how it changes over time through numbers.

For many people, financial statements can seem complicated and difficult to understand. However, you don't need to master every accounting rule or understand every detail of how financial statements work.

Even a basic understanding of the fundamental concepts can make a significant difference. It gives you the ability to understand financial information, communicate more effectively, and make better decisions compared to having no understanding at all.

Balance Sheet

The balance sheet is one of the main financial statements.

It shows what a company owns and how those assets were obtained. By reading a balance sheet, you can evaluate the financial stability and strength of a company.

A balance sheet shows:

• What the company owns (assets)

• How much the company owes (liabilities)

• How much the company is worth after subtracting what it owes (shareholders' equity)

For example:

A company has total assets of 100. However, 30 of those assets were financed through borrowing. This means the company has 70 of net assets, which represents the shareholders' equity.

The balance sheet helps you understand the relationship between what a company has, what it owes, and what remains as the company's net value.

Income Statement

The income statement is one of the main financial statements.

It shows a company's financial performance over a specific period of time. By reading an income statement, you can understand how a company's wealth has increased or decreased as a result of its business activities.

An income statement shows:

• How much revenue a company earned

• What expenses it incurred

• The resulting profit or loss

For example:

A company purchases products for 100 and sells them for 150. It also spends 20 on expenses directly related to those products.

In addition, the company receives 15 from other activities and has 10 in related expenses.

As a result, the company earns a profit of 35.

150 - 100 - 20 + 15 - 10 = 35

The income statement helps you understand how business activities create profit and how each transaction affects the company's financial results.