What is a financial statement?

Financial statement? (definition)

A financial statement is a report that shows the financial activities and performance of a business. It is used by lenders and investors to check a business’s financial health and earnings potential.

Financial statements can cover any period of time, although they’re most commonly prepared at the end of a month, a quarter, or a year.

Types of financial statement

There are four basic financial statements in accounting:

1. Balance sheet: A snapshot of your business’s financial condition at a single point in time, it shows what you own (your assets) vs what you owe (your liabilities). The difference between the two is often used as a starting point for valuing a business.

2. Profit and loss statement: Also called an income statement, this report shows your business’s revenues and expenses. Expenses are subtracted from revenues to show your business’s profit or loss figure, also known as net income.

3. Cash flow statement: Also called a statement of cash flows, this report shows changes to the cash coming in and out of your business over a period of time. It only records cash (which may not be all of your income), and includes amounts received from lenders and investors. A cash flow statement shows whether you can cover short term expenses like bills and payroll.

4. Statement of changes in equity: Also called a statement of owner's (or shareholder’s) equity, or statement of retained earnings, this report shows how much money your business keeps (rather than pays out to shareholders or owners). Often, these retained earnings are used to make debt payments or are reinvested in the business.

Combined, these statements provide a good view of the financial health of your business.

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.