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How To Understand And Use Financial Statements

Updated on October 3, 2012


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


There are basically 2 types of financial statements

  • Balance sheet
  • Income statement


  • 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


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


  • Mortgages
  • Car payments
  • Credit card debt
  • Loans


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


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


  • 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!


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!


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