The basic financial statements

What are they? What is its purpose? How many there are? The basic financial statements are the different documents that the company must prepare at the end of the accounting year, in order to know the financial situation and the economic results obtained in the activities of the company over a period.

The economic and patrimonial situation of a company is reflected in the financial statements. These documents, therefore, are essential to know if a company is profitable or not.

Not only that, but, in addition, they are legally mandatory for mercantile companies and the self-employed with limited liability. These annual accounts will be public. That means that any person or entity can request a copy.

The main financial statements are these three:

  1. Balance sheet .
  2. Income statement .
  3. State of flows .

There are also some more, such as the statement of retained earnings, explanatory notes, the statement of changes in equity or the statement of changes in the financial situation. All important data contained in these documents are usually collected in a financial report, which serves to know the situation of the company at a financial level.

Balance sheet

The balance sheet or situation is the accounting document that informs the financial situation of the company at a given time . Basically, it is a report that presents, in a very clear way, the patrimonial situation of the company: what it has (active), what it owes (passive), the value of its properties and rights, obligations and capital.

It is essential that the balance is never out of control. This means that the total assets must be equivalent to the sum of the liability plus net equity. If this is not the case, you should see where the error is.

When making the calculation, you must take into account the different assets of these three variables:

  • The asset: in turn, is divided into current and non-current assets. The latter refers to the assets and rights that will be part of the corporate assets for a minimum period of one year. It includes, among others, real estate for which you receive a rent, long-term financial investments or machinery. Current assets, on the other hand, are those that will be part of the estate less than 12 months (the cash in the box or the merchandise for sale, for example).
  • Liabilities : like the previous one, it is classified as current (short-term debts) and not current (long-term debts).
  • Net worth : is divided into own funds and grants.

Depending on the number of workers and the amount of turnover, the balance sheet can be normal, abbreviated or SME.

Statement of income

Also known as profit and loss statement, it summarizes the operations derived from the economic activities of a company during a given period.

The final result is obtained after subtracting the different expenses, both actual and future, in the form of promissory notes, checks, interest, etc. from the income of a company during a certain fiscal period.

In order to prepare the income statement, all expenses, losses, benefits and income are broken down in detail. They are distributed in different categories to obtain two types of results: before and after applying taxes.

This document serves to show if the company is meeting its financial objectives. It also offers the possibility of knowing what your profitability is, what assets you own, how you have obtained them and even how much money you get for each euro invested.

Normally, the income statement is calculated annually, but its periodicity is flexible. If during that period the net income exceeds the expenses, your company will have obtained benefits (positive balance). When the opposite occurs, it means that you are entering losses (negative balance).

To be able to make the calculations quickly and correctly, it is best to have all the figures ordered and to account for both expenses and income at the time they occur. In this way, when the time comes you will only have to add the amounts and settle them in the corresponding account. Digital accounting software is a great ally to help you with this task.

Flow statements

Informs about the variations and movements of cash and their equivalents in a given period. The information of the cash flows (amount of money a company has circulating) is useful because it provides the basis for assessing the ability of the company to generate cash or equivalents and also shows its liquidity needs.

In addition, it is possible to know in detail where the cash has come from and where it has gone. Keep in mind that it is not the same to obtain money from a loan than from a financial contribution from the partners.

The Cash Flow Statement classifies movements by activity. You can talk about three types:

  1. Cash flows from operating activities: payments and collections related to the main activity of the company.
  2. Cash flows from investment activities: payments to acquire non-current assets and collections from sales or amortizations.
  3. Cash flows from financing activities: collections that come from the sale of securities or securities and payments made to repay loans, for example.

Usefulness of the financial statements

From all the above it can be deduced that the financial statements are a basic instrument for the evaluation of the performance of a company, since they are an important part for the application of financial formulas, statistics and comparisons.

The preparation of the different documents that reflect the financial statements is very useful for, among others:

  • Know if there is any kind of mismatch in the company’s general accounts or budgets that interfere with its normal operation and viability.
  • Establish and delegate responsibilities between different departments and professionals.
  • Know if your finances, those of your customers and suppliers are healthy or not.
  • Having enough information to make decisions related to management.
  • Provide transparency about the economic status of the company.
  • See the evolution of a year with respect to the previous one and, with it, be able to make decisions for the future.
  • Compare the financial situation of your company with that of the competition.
  • Have prepared the necessary documentation to request financing or put it on sale.
  • Offer the basis for the calculation of taxes by the Public Administrations.