Financial Reporting

Financial statements provide a crucial snapshot of a company's financial health. Three key reports in this process are the trial balance, the income statement, and the balance sheet. While they are all interconnected, they serve distinct purposes and provide different views of a company's financial position.

Trial Balance

A trial balance is an internal accounting worksheet that lists all the debit and credit balances from a company's general ledger accounts at a specific point in time. Its primary purpose is to ensure that the total of all debit balances equals the total of all credit balances, a fundamental principle of double-entry bookkeeping.

• Key features:

  • An internal, working document.

  • Lists every account from the general ledger.

  • Divided into two columns: one for debit balances and one for credit balances.

  • It is the first step in preparing formal financial statements.

Income Statement

An income statement (also known as a profit and loss statement or P&L) is a formal financial statement that shows a company's revenues, expenses, gains, and losses over a specific period of time (e.g., a quarter or a year). It's designed to show the company's profitability and financial performance. The final line of the income statement is the net income (or loss).

• Key features:

  • A formal financial statement.

  • Reports on a period of time.

  • Shows revenues, expenses, and net income.

  • Used by both internal and external stakeholders to evaluate a company's performance.

Balance Sheet

A balance sheet is a formal financial statement that provides a snapshot of a company's financial position at a specific point in time. It's built on the fundamental accounting equation:

$Assets=Liabilities+Owner′sEquity$

It shows what a company owns (assets), what it owes (liabilities), and the amount invested in the business by its owners (equity).

• Key features:

  • A formal financial statement.

  • Reports on a specific date.

  • Shows assets, liabilities, and owner's equity.

  • Used by stakeholders to assess a company's financial health, solvency, and liquidity.