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How To Understand And Use Financial Statements

Updated on October 3, 2012

UNDERSTANDING FINANCIAL STATEMENTS

Who needs financial statements? Just about everyone.

If you want to understand finances or how to get ahead in life financially, it is imperative that you take the time to understand basic finance. Basic finance includes the financial statement.

If you are a business, the importance of knowing how to do a financial statement or more importantly understand it is vital.

You have to understand where your money is coming from and where it's going out. There are things that you own and monies that you owe.

Taking the time to understand financial statements can easily turn your financial life around from drowning to flying.

These are basic principles that anyone can apply and learn in minutes...and they apply to personal finances or business finances.

Let's take a look at the nuts and bolts of a financial statement.

public domain photo
public domain photo

WHAT KINDS OF FINANCIAL STATEMENTS ARE THERE?

There are basically 2 types of financial statements

  • Balance sheet
  • Income statement

BALANCE SHEET

  • Consists of assets (things you own) and liabilities (what you owe)
  • Assets - liabilities = your net worth
  • Relevant at that moment in time of terms of current assets and liabilities



EXAMPLES OF ASSETS

  • Money in bank
  • Stocks
  • Market value of property you own
  • Cars that you own

EXAMPLES OF LIABILITIES

  • Mortgages
  • Car payments
  • Credit card debt
  • Loans


INCOME STATEMENT

Maps out money coming in (income) and money going out (expenses)

Income - expenses = net income

Income statements cover a period of time rather than a moment like balance sheets

SOURCES OF INCOME

  • Job
  • Owned property
  • Other income sources such as small business or writing job for instance

EXPENSES

  • Mortgage
  • Cars
  • Credit Cards
  • Food
  • Utilities
  • Fuel
  • Clothing
  • Education

Using Financial Statements for Financial Planning

As you can see, learning how to create financial statements, whether on a personal or a business level, is invaluable when it comes to financial planning basics.

Knowing where one is at all times in terms of their finances is essential to keeping financially above water.

There are many financial programs available for free on the Internet or you can simply draw up your own from the items listed above.

It's always a good idea to look at your current financial plan and then have a "goal" financial plan worked out, too.

Take the time to study your current financial statement from time to time and see how it's progressing towards your goal financial statement.

Financial planning is the backbone to financial success and learning how to read or create financial statements will help you achieve your financial goals for a lifetime!

WHAT'S A FINANCIAL STATEMENT FOR?

For a personal financial statement, a balance sheet will show what you own and what you owe. 

For an income statement, it will show what you made and what you spent.  It's just that simple.

The importance of these statements is for determining answers to question such as these.

  • Is my income greater than what I'm spending?  (Should be to be financially free)
  • Is there a way to increase my outside income or should I try and boost my job income?
  • By a raise or getting a better job?
  • Where is my money going and how can I reduce those expenses?
  • Is my net worth increasing or decreasing?
  • Is my debt working for me such as buying homes that increase my income or am I wasting money on bad debt like cars, boats, trips or timeshares?

By examining what you see on paper in terms of a financial statement, you can easily see where your strengths are and where you may have weaknesses.  Being able to objectively look at the facts and figures will help you plan for the future and increase your net worth, guaranteed!

Comments

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    • akirchner profile imageAUTHOR

      Audrey Kirchner 

      7 years ago from Washington

      Gus...it's one of those evil things that we just 'have to do' is what I think. I agree with you that if you don't see the 'points spread' on paper, you can't possibly know where you're at.

      I think it all boils down to what's coming in, what's going out and what you need to make it all work! Audrey's Finance 101...and I'm NOT a numbers gal as I always get the numbers wrong!

    • GusTheRedneck profile image

      Gustave Kilthau 

      7 years ago from USA

      Hi Audrey - I hate financial statements because they are covered over with numbers - and, if there is anything worth hating, it is numbers. Even so, I have had to deal with financial statements for too many years, being fortunate enough to get stuck with being a board member of one business after another - and all of that meant figuring out what those financial statements were telling me and the others. Actually they may tell you a lot more and better than will the monthly bank statements which, for the sake of simplicity, you might regard as the little brother or sister of those more complex financial statements.

      Thanks for the fine article, Audrey.

      Gus :-)))

    • akirchner profile imageAUTHOR

      Audrey Kirchner 

      7 years ago from Washington

      I hear ya, Katie - Bob is my financial guru and he is laughing about all that I've learned....I won't try and be an expert though and will leave the nuts and bolts to him! Thanks for the read!!

    • katiem2 profile image

      katiem2 

      7 years ago from I'm outta here

      Oh I sigh with this information as my BF is accountant and is swamped with work as his firm is growing tremendously. So he's the financial guru in my life and financial planning is vital for each of us to understand. I open my mind and learn, it's rewarding to learn to do better with money and just learning things like this helps us to do better and differently. Well Done! :) Katie

    • akirchner profile imageAUTHOR

      Audrey Kirchner 

      7 years ago from Washington

      Thanks, Hanna - I might just learn a bunch of things yet!

    • Hello, hello, profile image

      Hello, hello, 

      7 years ago from London, UK

      Great hard work. You definitely covered everything here.

    • akirchner profile imageAUTHOR

      Audrey Kirchner 

      7 years ago from Washington

      Thanks, Pamela....me too by proxy since Bob is an accountant!

    • Pamela99 profile image

      Pamela Oglesby 

      7 years ago

      I have seen more financial statements than I ever desired. This was a very well explained hub however, and they are a necessary item.

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