The financial components of a company’s financial statements include assets, liabilities, equity, and capital. If you want to learn more about a specific financial component, you can find information on its own page, which is often labeled as “the page” or “the area.”
An asset is an item of value that the company controls and can use to produce revenue or generate profit. Assets are recorded on the balance sheet and generally include things such as cash, inventories, property, and investments.
A liability is an obligation of the business that has to be paid by someone else. On the balance sheet, you’ll see liabilities listed as an amount owed and are often categorized as “current” or “non-current.”
An equity account represents the amount owned by the company. This amount is called the “owners’ equity” and is usually recorded on the balance sheet as a debt or “owed” amount.
How to Read Financial Statements
When reading a financial statement, it’s important to understand the basic format and what each item on the page means. If you skip these details and get lost in the weeds, you’ll miss the big picture.
The first thing to know is the two different types of financial statements. The two types of financial statements include: – Balance sheet – It lists assets, liabilities, and equity at the company’s beginning point. It also includes the “book value” of the items listed. – Income statement – It shows revenue, expenses, and net profit/loss during a specific period.
Next, make sure you understand the different categories of financial statements. The four categories of financial statements are: –
Financial statements – These include the balance sheet, income statement, and cash flow statement. – Supplementary information – This section of the financial statement (typically found at the bottom) may include information such as the number of shares outstanding, and a note about the figures. – Notes – These provide additional information, such as a description of a footnote on the financial statement, or a note about a figure on the statement.
Asset accounts include cash, inventory, and accounts receivable. A company records its asset account at the date of purchase and updates the account according to its original value. For example, if the company purchases $10,000 worth of inventory, it records that amount as its asset account. At the end of the fiscal year, the company will write off that amount as unsold inventory, decreasing the asset account’s value.
A liability account is created when a business agrees to pay an individual or organization for services or goods the company has provided. The amount the business owes this person is called the liability account.
Equity accounts include the company’s owned shares, or equity. The amount shown as the “debt” owed to shareholders represents the company’s ownership in the business.
This category includes several subcategories, including “net equity,” “net debt,” “total equity,” and “total debt.” “Net equity” represents the current amount owned by the company, “net debt” includes the amount owed to creditors, “total equity” includes the total owned by the company and “total debt” represents the total owed to creditors.
When analyzing a company’s financial statements, remember to keep in mind the four main components: assets, liabilities, equity, and capital. These components will help you understand the company’s financial health and future plans.
Financial statements are an important part of any business’s operations. Understanding the components of a company’s financial statement can help you spot problems before they become major issues.
With practice or by taking financial statement courses, you’ll be reading financial statements like a pro in no time.