Financial statements are the formal reports that summarize an entity’s financial position, performance, and cash flows over a given period.
Most entities produce three primary financial statements. The balance sheet captures what the entity owns and owes at a single point in time. The income statement shows whether the entity earned a profit or incurred a loss over a period. The cash flow statement tracks actual cash moving in and out during that same period. Some frameworks add a statement of changes in equity or a statement of comprehensive income, but the three listed above form the core set.
Financial statements don’t appear from thin air. They’re derived from the ledger, which records every transaction under double-entry rules. At the end of a reporting period, accountants prepare a trial balance to confirm that debits equal credits, then use those balances to compile the statements. External auditors review the finished statements to assess whether they present a fair picture of the entity’s finances [citation needed].
Related terms
- Balance sheet — reports assets, liabilities, and equity at a point in time.
- Income statement — reports revenues and expenses over a period.
- Cash flow statement — reports cash inflows and outflows over a period.
- Trial balance — a listing of all ledger account balances used to prepare financial statements.
- Ledger — the complete record of an entity’s transactions, organized by account.