The Purpose of Financial Statements
Financial statements are structured reports that summarise a company's financial activities and position. They serve as the final output of the accounting process and provide essential information to various stakeholders.
The Three Main Financial Statements
| Statement | Purpose | Time Frame |
|---|---|---|
| Income Statement (Profit & Loss) | Shows revenues and expenses to determine profitability | For a period (e.g., month, quarter, year) |
| Statement of Financial Position (Balance Sheet) | Shows assets, liabilities, and equity | As of a specific date |
| Cash Flow Statement | Shows cash inflows and outflows | For a period (e.g., month, quarter, year) |
1. Income Statement (Profit & Loss)
The Income Statement shows whether a business is profitable by reporting revenues earned and expenses incurred during a specific period.
ABC COMPANY
Income Statement
For the Year Ended 31 December 2025
Income Statement
For the Year Ended 31 December 2025
| Revenue | £125,000 |
|---|---|
| Less: Cost of Sales | (£48,000) |
| Gross Profit | £77,000 |
| Operating Expenses: | |
| Rent Expense | £15,000 |
| Wages Expense | £28,000 |
| Utilities Expense | £5,200 |
| Depreciation Expense | £4,800 |
| Insurance Expense | £3,200 |
| Total Operating Expenses | (£56,200) |
| Operating Profit | £20,800 |
| Interest Expense | (£2,500) |
| Profit Before Tax | £18,300 |
| Corporation Tax | (£3,660) |
| Net Profit | £14,640 |
2. Statement of Financial Position (Balance Sheet)
The Balance Sheet shows a company's financial position at a specific point in time, reporting on assets, liabilities, and equity.
ABC COMPANY
Statement of Financial Position
As of 31 December 2025
Statement of Financial Position
As of 31 December 2025
| Assets | |
|---|---|
| Current Assets: | |
| Cash | £42,000 |
| Trade Receivables | £28,500 |
| Inventory | £35,000 |
| Prepaid Expenses | £4,500 |
| Total Current Assets | £110,000 |
| Non-current Assets: | |
| Equipment | £75,000 |
| Less: Accumulated Depreciation | (£25,000) |
| Land | £90,000 |
| Total Non-current Assets | £140,000 |
| Total Assets | £250,000 |
| Liabilities and Equity | |
| Current Liabilities: | |
| Trade Payables | £24,000 |
| Wages Payable | £8,500 |
| Corporation Tax Payable | £3,660 |
| Total Current Liabilities | £36,160 |
| Non-current Liabilities: | |
| Long-term Loans | £65,000 |
| Total Non-current Liabilities | £65,000 |
| Total Liabilities | £101,160 |