Financial statements facts for kids

This old document is a financial statement from 1906.

In the world of business, a financial statement is like a special report card for money. It's an organized document that shows all the important money information for a person, a company, a government, or an organization.

These reports help people and groups make smart choices. For example, if you want to invest in a company, you'd look at its financial statements to decide if it's a good idea and how much to invest. They show how much money came in, how much went out, and what the company owns or owes.

What are the Main Financial Statements?

Financial statements can look different, but most countries use four main types. Think of them as different views of a company's money story.

What is a Balance Sheet?

A Balance Sheet (also called a Statement of Financial Position) is like a snapshot of a business's money health on a specific day. It lists:

• What the business owns. These are called assets. For a person, assets could be their house or car.
• What the business owes. These are called liabilities (which include debts). For a person, liabilities could be a mortgage or credit cards.
• The money the owner has put into the business. This is called equity. It shows the owner's investment.

The Balance Sheet always balances out: what you own equals what you owe plus the owner's investment.

Understanding Profit and Loss

A Statement of Profit or Loss (or Income Statement) tells you if a business made money or lost money over a period, usually a year. It works like this:

• It adds up all the money the business earned (called revenues), even if the payment hasn't arrived yet.
• Then, it subtracts all the costs the business had (called expenses), even if they haven't been paid yet.
• The final number shows if there was a profit (money left over) or a loss (more money spent than earned).

How Owner's Investment Changes

A Statement of Changes in Equity shows how the owner's investment in the business has changed over time. It tracks things like:

• New money the owner put in.
• Profits that were kept in the business.
• Money the owner took out.

For a big company, this statement helps separate the owner's initial investment from other money the company has saved or earned.

Where Does the Cash Go?

A Statement of Cash Flows is all about the actual money (cash) moving in and out of a business during the year. It groups these cash movements into three main types of activities:

• Operating Activities: Cash from the main things the business does every day (like selling products or services).
• Investing Activities: Cash used to buy or sell long-term things, like buildings or equipment.
• Financing Activities: Cash related to borrowing money, paying back loans, or getting money from owners.

This statement helps you see exactly where a business's cash came from and where it went.

See also

In Spanish: Estados financieros para niños