Financial statements are reports made from accounting records that summarize a business's performance and financial position. There are three main financial statements: the balance sheet, which provides a snapshot of what a business owns, owes, and is worth at a point in time; the income statement, which records revenues, expenses, and profits over a period of time; and the cash flow statement, which summarizes all cash inflows and outflows during a period. Accounting transactions are recorded through journals and ledgers then organized into these three key financial statements.

1. Lesson 5: Introduction to Financial Statements

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What are financial statements?
• They are financial reports made from the accounting records of the business.
• They contain a summary of the business’ performance for a period (usually a
year) and position as of the date of the report.

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Introduction to Financial Statements
Accounting is a language

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Introduction to Financial Statements
Your Business Your Neighbor
How many eggs do we have?
Are the eggs increasing or decreasing?

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Introduction to Financial Statements
How many
eggs do we
have? Where did
they come
from?How many
are
borrowed?
How many
are owned?
100
30
70
An egg is laid
+1
+1
Two eggs are broken
- 2
- 2
99 99
10 eggs are laid
+ 10
+ 10
109 109
2 eggs are paid off to the
neighbor
- 2
- 2

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Introduction to Financial Statements
107
28
79
As of now
100
30
70
As on beginning

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Introduction to Financial Statements
How did the business do between these two dates?
Number of eggs laid
Number of eggs broken
An egg is laid
Two eggs are broken
(+) 9
(+) 1
(-) 2
(+) 10
70 79
10 eggs are laid

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Imagine a movie
Freeze Freeze Freeze
Flow of EventsFlow of Events

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Imagine a movie
Balance Sheet Balance Sheet Balance Sheet
Income
Statement
Income
Statement

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What is a Balance Sheet?
• A balance sheet is a summary statement of:
• What a business owns;
• What a business owes; and
• What it is worth today
• It is a snapshot at a given point in time
• It is thus called the ‘Statement of Position’

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What is a Balance Sheet?
• What does a business own?
• Land
• Buildings
• Equipment
• Inventory (stock of goods)
• Cash and Bank
• These are called “Assets”
• Assets are also rights that you own, that have a monetary value. For eg: Right to
collect cash from a customers who owe you money (Debtors/Receivables)

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What is a Balance Sheet?
• What does a business owe?
• Amounts payable for purchasing materials
• Salaries payable to its employees
• Amounts borrowed from the bank
• These are called “Liabilities”

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What is a Balance Sheet?
• The amount that is left over in the business after paying off the liabilities, is the
worth of the business.
• Accountants call this “Equity”.This belongs to the owners of the business.

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What is an Income Statement?
• An income statement shows the revenues, costs and expenses of a business over
a period of time (usually a month, a quarter, six months or a year).
• This records all the events during this period (similar to the movie effect we saw
earlier).
• It shows the performance of the business during the period, and is hence called
the ‘Statement of Performance’.
• Revenues, expenses and costs are recorded on an ‘Accrual’ basis.

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What is a Cash Flow Statement?
• Shows a summary of all cash inflows and outflows during a period.
• While the Income Statement records transactions on an ‘Accrual’ basis, the Cash
Flow Statement records transactions as and when cash is received or paid.

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The Accounting Process
Transactions
Involves cash
Does not involve
cash
Cash Book Journal Book
General Ledger
Trial Balance
Balance Sheet
Income
Statement
Cash Flow
Statement

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The Three Financial Statements
• Balance Sheet
• Assets (what you own)
• Liabilities (what you owe)
• Equity (how much you are worth)
• Income Statement
• Revenues (what you earn)
• Expenses and costs (what you spend)
• Profit (what is left over)
• Cash flow statement
• Cash inflows (How much cash came in)
• Cash outflows (How much cash went out)
• Cash balance (How much cash is left)

18. Summary
Introduction to Financial Statements
• There are three main financial statements:
• Balance sheet
• Income Statement
• Cash flow statement

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