The 4 Core Financial Statements

There are four core financial statements you need to master to make it in business, and they all connect.

First is the Income Statement. It shows how much money a company made or lost OVER A STRETCH OF TIME. And the formula is simple: it’s just revenue minus expenses. You list all of them out and add them up to find out, Did the business make money, or lose it?

That number becomes the starting point for the next statement — the Statement of Owner’s Equity.

This statement shows the owner's equity for a specific period of time, or, in other words, the value of the organization, kinda like net worth. It also shows how much money the owners invest and the distributions that are paid to the owners.

That new total then shows up on the next statement — the Balance Sheet.

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The Balance Sheet is like a photo, it’s taken on one single day. It shows what the business owns, what it owes, and what's left over for the owners. In financial terms that's your assets, liabilities, and equity.

One of the things it owns (the assets) is cash. And where that cash actually goes is the job of the last statement: the Statement of Cash Flows.

The first three statements count a sale the moment it happens, even before any cash shows up, but it doesn't measure how much the business actually has on hand at any given time. This last one just follows the actual dollars, in and out.

These financial statements are how stakeholders—or the people affected by business decisions—analyze the company’s performance.

And you need to know how they work, but the good thing is they're not as complicated as they look. The next four entries will cover exactly how to use each of them.