Types of Financial Statements

A complete set of financial statements for a business enterprise consists of three principal statements, each answering a different question, supported by the notes that explain them.

1. Statement of Profit and Loss (the income statement). This statement measures the financial performance of the business over the accounting period — that is, whether it earned a profit or suffered a loss. It sets the revenue earned during the period against the expenses incurred to earn that revenue; the difference is the net profit (if revenue exceeds expenses) or net loss (if expenses exceed revenue). It typically shows revenue from operations, other income, the various heads of expense (cost of materials consumed, employee benefit expense, finance costs, depreciation, other expenses), the profit before tax, the tax expense and finally the profit after tax for the period. Because it covers a period of time, it is often described as a flow statement.

2. Balance Sheet (the statement of financial position). This statement shows the financial position of the business as on a particular date — normally the last day of the accounting year. It lists, on one side, what the business owns (its assets) and, on the other, what the business owes — to outsiders (liabilities) and to the owners (capital / shareholders' funds). It is built on the fundamental accounting equation, Assets = Liabilities + Capital, and so it always balances. Because it captures the position at a single point in time, it is described as a position statement or a stock statement, not a flow statement.