Financial statements: types, uses and how to read them

Published Monday 26 October 2026

Table of contents

• What is a financial statement?
• Types of financial statements
• Financial statements required in Malaysia
• How to read financial statements
• Financial statement example: how one sale flows through
• Why financial statements are important for small businesses
• How to use financial statements to analyse your business
• Ways to use your financial statements
• Financial statement templates for your business
• Simplify your financial statements with Xero
• FAQs on financial statements

Key takeaways

• Read all four financial statements together, since net profit from your income statement flows into retained earnings on your balance sheet
• Track accounts receivable separately from revenue, because a credit sale adds profit when you invoice but adds cash only when your customer pays
• Lodge your company's accounts with the Companies Commission of Malaysia (SSM) on time, even if your private company qualifies for audit exemption
• Compare statements across periods and use ratios like the current ratio to check you can cover short-term bills

What is a financial statement?

A financial statement is a formal record of your business's financial activity and performance over a set period, usually a month, quarter or year. International standards such as International Accounting Standard (IAS) 1 Presentation of Financial Statements set out how to prepare them. You'll find the Malaysian rules further down this guide.

Lenders and investors use your financial statements to judge your business's financial health and earnings potential.

Types of financial statements

Four main types of financial statements give you a complete picture of your business's financial health:

• Balance sheet: shows what you own and owe at a point in time
• Income statement: tracks revenue and expenses over a period
• Cash flow statement: records money moving in and out
• Statement of changes in equity: shows retained profits and owner investment

Balance sheet

The balance sheet shows your business's financial position on a specific date by comparing what you own with what you owe. It has three parts:

• Assets: what your business owns, such as cash, equipment, inventory and intellectual property
• Liabilities: what your business owes, including loans, accounts payable and other debts
• Equity: what's left after subtracting liabilities from assets, which is the owner's stake in the business

To find equity, subtract total liabilities from total assets. For example, if your business owns RM200,000 in assets and owes RM120,000, your equity is RM80,000.

This equation shows your net assets on one date. To judge financial stability, look at it alongside liquidity ratios, debt levels, profitability and operating cash flow.

Income statement or profit and loss statement

The income statement, also called the profit and loss statement, shows your business's revenue and expenses over a period. Subtract cost of sales from revenue to find gross profit, then subtract operating expenses to find net profit.

Here's an illustrative example for a manufacturing business:

• Revenue: RM150,000
• Cost of sales: RM70,000 (materials and labour)
• Gross profit: RM80,000 (RM150,000 minus RM70,000)
• Operating expenses: RM50,000 (office rent and utilities)
• Net profit before tax: RM30,000 (RM80,000 minus RM50,000)

Tax then comes off the RM30,000 to give your final net profit.

Cash flow statement

The cash flow statement tracks money moving in and out of your business over a period. It shows whether you can cover short-term costs like bills and payroll.

Cash flow statements record three types of activity:

• Operating activities: cash from day-to-day trading, like customer payments
• Investing activities: cash from buying or selling assets, like equipment
• Financing activities: cash from loans, investor funding or dividend payments

What goes in each section can vary between companies. The International Accounting Standards Board (IASB) cites research on 798 companies across 13 European countries in its IFRS 18 effects analysis. That research found 76% of the sample also included interest paid in operating activities.

Statement of changes in equity

The statement of changes in equity shows how your equity moves, including the profit your business keeps after costs and dividends to owners. A statement of retained earnings is a simpler version that focuses on that retained profit. Businesses typically keep earnings to:

• repay debt
• reinvest in growth
• build a cash reserve for unexpected costs

Financial statements required in Malaysia

If you run a private limited company (Sdn Bhd), Malaysian rules decide which accounting standards you follow and whether you need an audit. They also set deadlines for filing with the Companies Commission of Malaysia (SSM).

MPERS vs MFRS

Your type of company decides which financial reporting framework you can use. The Malaysian Accounting Standards Board (MASB) says the Malaysian Private Entities Reporting Standard (MPERS) applies only to private entities.

A private entity can choose MPERS or the Malaysian Financial Reporting Standards (MFRS), but it must apply its chosen framework in full. Entities that aren't private entities, a wider group than listed companies, are required by law to use MFRS, which follows International Financial Reporting Standards (IFRS).

The MASB issued a revised MPERS (2025) in October 2025, based on the third edition of the IFRS for SMEs Accounting Standard. It applies to annual periods beginning on or after 1 January 2027, and MPERS (2016) applies until then unless you adopt the new version early.

If you report under MFRS, MFRS 18 replaces MFRS 101 for periods beginning on or after 1 January 2027. Whichever framework you use, your accounts still show how each year's profit adds to your retained earnings.

Audited financial statements under the Companies Act 2016

The Companies Act 2016 sets the baseline for what your accounts must show and who checks them. Under section 249(1), your annual financial statements must give a true and fair view of your year-end position and yearly performance.

Section 267(1) requires every private company to appoint an auditor for each financial year, unless it qualifies for audit exemption.

For financial periods starting on or after 1 January 2025, SSM Practice Directive (PD) 10/2024 sets the exemption test. The directive doesn't apply retrospectively, so earlier periods follow the previous rules. Your company qualifies by staying within at least two of three limits (revenue, total assets, employees) for the current and two previous years.

The limits rise in phases, based on when your financial period starts:

• for periods starting in 2025, revenue and total assets of up to RM1 million each and up to 10 full-time employees
• for periods starting in 2026, revenue and total assets of up to RM2 million each and up to 20 full-time employees
• for periods starting on or after 1 January 2027, revenue and total assets of up to RM3 million each and up to 30 full-time employees

For example, if your financial year starts on 1 January 2026, your 2026, 2025 and 2024 figures are all tested against the 2026 limits.

Audit exemption covers the audit alone, so you still lodge unaudited financial statements with SSM, along with a certificate signed by a director. Those statements must follow your approved accounting standards, and there's no need to apply to SSM for the exemption itself.

Shareholders holding at least 5% of shares can still require an audit by giving notice no later than one month before year end.

The exemption excludes public companies, subsidiaries of public companies, foreign companies and exempt private companies that choose to lodge a certificate under section 260. Dormant companies, with no business or accounting transactions in the current and previous financial year, remain exempt from audit.

Filing with SSM

Once your accounts are ready, the next step is sharing them with your shareholders and then with SSM. Under section 258(1)(a), a private company must circulate its financial statements and reports to members within six months of its financial year end.

You then lodge them with SSM within 30 days of circulation under section 259(1)(a). If you need more time, you can apply to SSM's Registrar for an extension.

The 30 days run from circulation, so if you circulate on 30 June after a 31 December year end, you'd lodge by 30 July. The statements you circulate, together with the directors' report and any auditor's report, typically form the core of your company's annual report for shareholders.

How to read financial statements

Reading financial statements means understanding what the numbers say about your business's health. Get comfortable with the basics of each statement before moving on to detailed analysis.

Start with the basics of each statement

Each statement answers a different question:

• Balance sheet: what does my business own and owe right now?
• Income statement: did my business make a profit this period?
• Cash flow statement: where did my cash come from and where did it go?
• Statement of changes in equity: how much profit has stayed in the business?

Understand key financial terms

You'll see these terms across all financial statements:

• Assets: resources your business owns, like cash, equipment and inventory
• Liabilities: debts your business owes, like loans and accounts payable
• Equity: the owner's stake in the business, equal to assets minus liabilities
• Revenue: money earned from sales or services, before any costs come off
• Gross profit: revenue minus cost of sales
• Operating expenses: the day-to-day costs of running the business, like rent and utilities
• Net profit: gross profit minus operating expenses and tax

Read the statements together

Financial statements connect to each other. Net profit from the income statement flows into retained earnings on the balance sheet. Cash from operations on the cash flow statement should support the cash balance on the balance sheet.

Reading them together shows the full picture. A business can be profitable on paper and still run short of cash if customers pay late.

Compare statements over time

One statement shows a snapshot, while several show trends. Compare your current statements with previous periods to spot:

• growing or declining revenue
• rising or falling expenses
• changes in your cash position
• shifting debt levels

Trends help you act on opportunities early and see what's working.

Financial statement example: how one sale flows through

A single sale touches every statement, and following one through shows how they link. Say your trading business sells goods for RM10,000 on 15 March on 30-day terms, and those goods cost you RM6,000 (illustrative figures).

The sale on the profit and loss

The sale counts as revenue on 15 March, when you deliver the goods and send the invoice. Here's how it appears on your profit and loss:

• Revenue: RM10,000
• Cost of sales: RM6,000
• Gross profit: RM4,000 (RM10,000 minus RM6,000)

Leaving out other expenses and tax to keep things simple, the sale adds RM4,000 to your net profit for March.

The sale on the balance sheet

On 15 March, your balance sheet swaps one asset for another and records the profit. Here's what changes:

• Accounts receivable: up RM10,000, because your customer owes you
• Inventory: down RM6,000, because the goods have left your shelves
• Equity: up RM4,000 in current-year profit, which becomes part of retained earnings when you close the year

Total assets rise by RM4,000 (RM10,000 minus RM6,000), and equity rises by the same amount. Your balance sheet still balances.

The sale on the cash flow statement

Cash from this sale reaches your cash flow statement only when your customer pays on 14 April. In the operating activities section:

• March shows RM4,000 of profit, minus the RM10,000 rise in receivables, plus the RM6,000 fall in inventory, which equals RM0 of cash
• April shows a RM10,000 cash inflow as your customer pays and receivables drop back by RM10,000

The RM6,000 you paid your supplier for the goods appeared earlier, in the period when that cash left your account.

How the sale reaches retained earnings

When your customer pays in April, your profit and loss stays the same, because you recorded the revenue in March. The payment swaps receivables for cash on the balance sheet, so equity stays RM4,000 higher.

At year end, that RM4,000, less related expenses and tax, joins the net profit that moves into retained earnings. That's why a profitable month can still leave your bank balance short: the profit landed in March and the cash in April.

Why financial statements are important for small businesses

Financial statements give you a clear view of your business's finances. Understanding them helps you:

• check your position: see profitability, cash and costs at a glance
• secure loans and investment: show lenders and investors your business is profitable and can repay debts
• meet your obligations: support SSM lodgement and tax filing with accurate records
• track performance over time: find products or business areas that need attention or investment
• manage cash flow: plan for expenses, payroll and unexpected costs

How to use financial statements to analyse your business

Each type of financial statement helps you assess a different part of your business's finances. Together, they also support accurate tax reporting.

Analyse financial performance with the income statement

The income statement shows whether your sales cover your costs. Use it to:

• evaluate profitability: compare total revenue with net profit to see if your business is making money
• monitor expenses: review costs like cost of sales and operating expenses to find spending patterns
• track growth trends: compare periods to assess revenue growth, cost control and changes in profit margin

Using an income statement template, you can calculate three key profitability measures:

• Gross profit: revenue minus cost of sales
• Operating profit: gross profit minus operating expenses, though an IASB analysis found companies used at least nine different definitions of it
• Net profit: what's left after all expenses, including interest and tax

These figures show whether you need to adjust prices or cut costs.

Manage assets and plan for growth with the balance sheet

The balance sheet shows whether your business can meet its obligations, now and in the longer term. It helps you:

• assess liquidity: compare current assets with current liabilities to check you can cover short-term obligations
• evaluate solvency: examine long-term liabilities and equity to gauge stability, as a high debt-to-equity ratio signals risk
• track asset management: review how well inventory, property and equipment contribute to revenue

A balance sheet template gives you the figures for liquidity ratios, which show whether you have enough cash to pay your bills.

The cash ratio compares cash and cash equivalents with current liabilities at the balance sheet date. It's the most conservative of these measures.

The quick ratio measures your ability to cover current liabilities with your most liquid assets, so it leaves out inventory and often prepaid expenses.

The current ratio includes inventory alongside your other current assets. For example, RM50,000 of current assets against RM25,000 of current liabilities gives a current ratio of 2.

Manage your cash flow with the cash flow statement

The cash flow statement shows whether your business generates enough cash to meet its financial obligations. Use it to:

• analyse operating cash flow: check your core activities bring in enough cash to keep running, even when profits vary
• judge investment spending: track cash spent on equipment or expansion to see if you're reinvesting for growth
• monitor financing activities: review loans, equity funding and dividend payments to see how financing affects your cash

Analyse growth with the retained earnings statement

Your retained earnings statement shows how much profit stays in the business over time. A rising balance points to:

• growth potential: the ability to reinvest profits without borrowing
• financial health: more profit kept than lost or paid out over time

Ways to use your financial statements

A few regular habits help you turn your statements into decisions.

Look at the big picture beyond profit

Profit is one measure of how your business is doing. Reviewing all your statements together, including cash flow and liabilities, helps keep your business financially strong.

Pay attention to your cash flow

Even a profitable business needs to watch its cash closely. Check your cash flow statement regularly to confirm you can cover short-term costs.

Know the difference between revenue and cash

Sales you've recorded may not have reached your bank account yet, as the RM10,000 example above shows. Track accounts receivable separately so you know how much cash you can actually spend.

Analyse trends by comparing your financial statements

Comparing periods shows you where to put your time and money. Invest in areas that are performing well, and look closely at parts of the business with room to grow.

Get across your financial ratios

Financial ratios turn your statement figures into quick checks on liquidity and profitability. Calculate the current ratio and quick ratio regularly to track your position and make better decisions.

Track small recurring costs

Small recurring costs, like unused subscriptions or bank fees, add up over a year. Review your expense lines each month so you can cut the ones you no longer need and protect your profit.

Financial statement templates for your business

Pre-made templates save time when you create balance sheets, income statements and cash flow statements. They help you or your accountant produce consistent reports quickly.

Get started with Xero's free financial statement templates.

Simplify your financial statements with Xero

Financial statements are most useful when they're up to date and easy to read. Xero brings your accounting data into a clear set of financial reports, including your balance sheet and profit and loss. You can see where your business stands at any time.

Automated bank feeds keep your figures current, and you can work with your accountant in real time well before year end. Choose a plan and get one month free to see your numbers in one place.

FAQs on financial statements

Here are quick answers to common questions about financial statements.

What are the 4 types of financial statements?

The four types are the balance sheet, income statement (also called the profit and loss statement), cash flow statement and statement of changes in equity. Together, they show what you own and owe, whether you made a profit, where your cash went and how much profit you've kept.

What's the difference between the income statement and cash flow statement?

The income statement records revenue when you earn it and costs when you incur them, while the cash flow statement records money as it moves. Non-cash costs like depreciation also reduce your profit without any money leaving your bank account.

How often should I prepare financial statements?

Monthly or quarterly statements give you the clearest view of your business, even though international accounting standards require a complete set at least annually. Regular reporting helps you act on what you find sooner.

Can I automate my financial statements?

Yes. Accounting software like Xero builds your balance sheet, profit and loss and cash flow reports from your recorded transactions, saving you manual spreadsheet work.