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Understanding Financial Reports

Updated: Apr 18, 2022

Sweet! You did it! You have accounted for all the transactions for a time period. Then you have reconciled for that period. Now it is time to review reports, however you most likely need some guidance understanding what your looking at!

The three main reports you should be reviewing are the Profit and Loss, Balance Sheet and Statement of Cash Flows. Let's start with the Profit and Loss since it is required for every business to have one!

A Profit and loss shows how much you made in a given period. At the top is your income before expenses. Then it lists out your expenses with cost of goods sold in the middle (if applicable, service based business don't have costs of goods sold). At the very bottom it lists your net income (income minus expenses).

The balance sheet is like a scale. It lists your assets first. Then it will list your liabilities and equity. Keep in mind assets must equal liabilities and equity combined. Assets are checking accounts, savings accounts, cash on hand, equipment, computers, accounts receivable, ect. Liabilities are your loans, credit cards, accounts payable, and ect. Equity is the money you put into your business or paid yourself personally. Do your best to keep personal and business day to day transactions separate.

Cash Flows is a report that combines the Profit and Loss and Balance Sheet. It shows where your money is flowing to and from.

Keep in mind, the Profit and Loss is the most important report! That is why, I have created this Profit and Loss Template for you!

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