Financial statements are not separate documents. They are four angles on one story: the story of the business. Once you see how they link, you can catch errors before they reach the client.
Shows what the business owns and owes on a given date.
Show what happened during a period: what was earned and what came in and went out of cash.
The closing balance sheet gathers the accumulated effect of everything the other statements show. That is why it is called the "cumulative" statement.
| Report | What it shows | Basic structure |
|---|---|---|
| Statement of financial position (balance sheet) | Financial position at a date. | Assets = Liabilities + Equity |
| Income statement (profit and loss) | Performance for the period. | Revenue – Costs – Expenses = Net profit or loss |
| Statement of comprehensive income | Profit for the period plus other items not recognized in profit or loss. | Net profit + Other comprehensive income = Total comprehensive income |
| Statement of changes in equity | Contributions, dividends, reserves and retained earnings. | Opening balance + Contributions – Dividends + Comprehensive income ± Other = Closing balance |
| Statement of cash flows | Cash in and out from operating, investing and financing activities. | Operating + Investing + Financing = Change in cash |
| Notes | Accounting policies, details and explanations. | Narrative and breakdowns |
If comprehensive income includes other items (for example, revaluations), they reach equity by the same path.
The statement of cash flows explains why the "Cash and cash equivalents" line on the balance sheet changed between two dates.
Illustrative figures for a small business over one year.
| Opening balance | 50,000 |
| + Contributions | 0 |
| + Net profit | 10,000 |
| – Dividends | (3,000) |
| Closing balance | 57,000 |
| Opening cash | 20,000 |
| + Operating cash flow | 12,000 |
| + Investing cash flow | (8,000) |
| + Financing cash flow | (3,000) |
| Closing cash | 21,000 |
Notice that dividends appear in both statements: they reduce equity and, once paid, they are a financing cash outflow. That is how the two connect.
It increases by 7,000: 10,000 of profit – 3,000 of dividends.
There is a difference of 1,500 that needs investigating. It may be a misclassified movement in the cash flow statement or a missing entry in cash or bank accounts. Both statements must end at the same figure.
Because they explain the accounting policies and break down the figures. Without them, a reader does not know how the numbers were calculated or what they include.