Understanding Your Financial Reports

Written By Geoff Burns

Whether you are a small business owner, entrepreneur, or nonprofit leader, you need to use financial reports to evaluate your fiscal position. Unfortunately, even for seasoned leaders, most people don’t fully understand how their reports are generated, how to tell if they are accurate, what they mean, and what knowledge can be gained by reading them. In this series of articles, I will breakdown the most common reports, how they are created and what they mean. 

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The most common reports that you will need are the trial balance, income statement, balance sheet and statement of cash flows. Different reports may be needed or desired based upon your specific industry or field. For this series of articles, I will focus on these four reports. 

Ok, so what are these reports, and what do they do? Today, lets identify what the reports are and briefly look at the value of the trial balance. 

  • Trial Balance – A list of all debit and credit accounts for a specified period of time. 
  • Income Statement – A list of all revenue and expenses for a specified period of time.
  • Balance Sheet – A list of all assets, liabilities and equity for a specific point in time.
  • Statement of Cash Flows – A list of how money flowed in and out for a specified period of time. 
Of the four reports listed above, the Income Statement, Balance Sheet and Statement of Cash Flows are typically considered to be the three most important financial documents. They are the reports that you should expect to see and use to make decisions about your business or organization. If you have an accountant or bookkeeper and you are not receiving these statements, you need to find out why and remedy the situation posthaste. For nonprofit organizations, these documents should accompany any financial reporting.
 
I prefer to include the trial balance as well just to make sure everything balances out. Even though this is not a common report, it is a valuable tool to check and see if everything on the three primary financial reports looks accurate. 
 
So how does the trial balance help with the other three reports? All the trial balance does is compare all of the debits and credits. Since debits always must equal the credits (be in balance), if there are any discrepancies, we know there is something wrong. It could be the accounting software, accounting method, data entry error, or a myriad of other factors. An experienced bookkeeper or accountant should be able to identify the problem quickly.
 
In the next article, we will look at the income statement and what value it provides. 
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