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Financial statements are written records that illustrate the business activities and the financial performance of a company. In most cases they are audited to ensure accuracy for tax, financing, or investing purposes.

What are the elements of financial statements?

  1. Balance sheet (Statement of financial position)

The balance sheet shows what the company owns and how much it owes at the end of the period. It is based on the equation:

Assets = Liabilities + Shareholders’ Equity

Balance Sheet is a snapshot at a point in time. On the top half you have the company’s assets and on the bottom half its liabilities and Shareholders’ Equity (or Net Worth). The assets and liabilities are typically listed in order of liquidity and separated between current and non-current.

  1. Income statement (Statement of operation/profit and loss)

An income statement shows the profitability of a business. It details how much money a business earned and spent. The income statement covers a period of time, such as a quarter or year. It illustrates the profitability of the company from an accounting (accrual and matching) perspective. It starts with the revenue line and after deducting expenses derives net income.

It shows:

  • revenue from selling products or services
  • expenses to generate the revenue
  • net income (or profit) that remains after expenses
  • profit and loss on non-core activities, excluding current operations
  1. Cash flow statement

The cash flow statement, sometimes called a statement of changes in financial position, shows how money, including cash equivalents, has moved through a business during the period. Cash equivalents consist of short-term investments that are highly liquid and easily convertible to cash. They are usually held for less than three months.

The cash flow statement looks at the cash position of the company. It answers it answers the questions; How much of the organisation’s cash goes to its creditors and shareholders? Does it keep enough for its own investment and growth? It has three components: cash from operations, cash used in investing, and cash from financing.

  1. Statement of retained earnings

The statement of retained earnings shows the cumulative earnings of the business after any dividends or distributions to shareholders. This statement also shows the change in retained earnings between the opening and closing periods of each balance sheet. It may also show adjustments from related-party transactions.

For IFRS, a statement of changes in shareholders’ equity is required.

  1. Notes to the financial statements

Notes to the financial statements disclose the rules and assumptions made in preparing the statements and help interpret and analyze the information.

The Importance of Financial Statements

Financial statements are essential for managing a business and planning its future. They are used in strategic planning, budgeting and forecasting. They can be used to monitor interim and annual financial statements to see how well the business is performing, spot important trends and compare actual finances with targets, budgets and forecasts.

These statements are used by accountants to prepare tax reports or government agencies for auditing purposes. Financial statements are also used by lenders, investors and other partners to understand a business and its health.


Ultimately, financial statements are important for running a business. They’re a snapshot of a company’s finances and give crucial information about business performance. They’re also the foundation for planning business growth. They show the sustainability of a business and help business owners make informed decisions regarding revenue, expenses, assets, and losses.

At the same time, financial statements help investors, other shareholders, and external parties decide if a business is worth investing in.

This means every type of business (small or big) must prepare financial statements at least once in a calendar year in order to ensure sustainability and growth.

Contact us for expert accounting and tax services. We have a team of chartered accountants ready to help you manage your finances and grow your business. Visit our website for more information: www.alertsprofessionalservices.co.za or contact us on email: Gervasem@alertsprofessionalservices.co.za; WhatsApp: +27 72 490 8099