Which of the following provides three types of information assets liabilities and owners equity?

Whether you're looking for investors for your business or want to apply for credit, you'll find that producing four types of financial statements can help you.

If you're a small business owner, you may be thinking that your accountant is the only person who could possibly be interested in your business's financial statements.

But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals.

Understanding Financial Statements

It's important for the small business owner to understand these four types of financial statements and the information they provide for the investor or creditor interested in providing funds for your business.

Both individually and taken together, these financial statements give a potential investor or creditor a wealth of information and can have a serious impact on your business's ability to obtain the funds or financing it needs.

1. Balance Sheet

Also known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.

Based on the basic accounting equation, or balance sheet equation [Assets = Liabilities + Equity], the balance sheet provides a snapshot of a business's assets, liabilities, and equity.

It also provides users with a look at the business's financial position at a specific point in time, and financial statement analysts use the information it contains to calculate several important financial ratios.

2. Income Statement

The income statement is another important financial statement for your small business. It provides users with a picture of the business's financial performance over a specific period of time.

Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business's operating and nonoperating revenue and expenses.

Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business's financial performance.

3. Cash Flow Statement

The cash flow statement, also known as a statement of cash flows, or a statement of changes in financial position, is an important financial statement that gives users an understanding of how well a business is managing its cash flow.

Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses.

The typical cash flow statement format provides information about a business's cash from operating activities, cash from investing activities, and cash from financing activities.

4. Statement of Owner's Equity

The fourth financial statement that a business needs is a statement of owner's equity, also known as a statement of changes in equity, or a statement of shareholders' equity.

It shows the business's retained earnings—the profit kept, or retained, within a business rather than distributed to owners or shareholders—both at the beginning and at the end of a specific reporting period.

Retained earnings are often used to either reinvest in the company, or to pay off the business's debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital.

By preparing each of these financial statements, not only will you be able to provide a prospective investor or creditor with important information that they need to assess your business, but also you will be able to identify trends in your business's performance that will help you to position your business for continued success.

You can work with your accounting professionals or engage an online service provider to help ensure that your business is compliant with its reporting and obligations throughout the year.

Assets, liabilities and equity are the three largest classifications in your accounting spreadsheet. Assets are everything your business owns. Liabilities and equity are what your business owes to third parties and owners. To balance your books, the golden rule in accounting is that assets equal liabilities plus equity.

• What is the main accounting equation?
• What are examples of assets, liabilities, equity?
• Other formulas for assets, liabilities, equity
• Frequently asked questions

What is the main accounting equation?

The main accounting equation is: Assets = Liabilities + Equity. Together, they make up a company’s balance sheet.

The concept behind it is that everything the business has came from somewhere — either a third party, such as a lender, or an owner, such as a stockholder. Every dollar that a business holds is attributed to a third party or an owner.

This means that each thing a business has is classified as both an asset and a liability or an asset and equity. Here are two examples:

• An asset that is a liability: Your business has $10, but you borrowed it from George. The $10 is both an asset (cash) and a liability (a loan that you need to pay back).
• An asset that is equity: You invested $20 in your business buying equipment. The $20 is both an asset (equipment) and equity (owner’s equity that you should get back eventually).

What if your business generates money? Say your business earns a $5 profit that you put into a checking account. That profit is both an asset (cash) and equity (business profit held for future use). If your business collapsed tomorrow, the equity would be split between the owners.

What are examples of assets, liabilities, equity?

Here’s what assets, liabilities and equity may look like in a business.

Assets

An asset is anything that can be owned or controlled and generates — or will generate — an economic benefit.

• Liquid assets: Cash and cash equivalent
• Tangible assets: real estate like buildings and land; and business equipment such as machinery and vehicles
• Intangible assets: Patents, investments like stocks and bonds
• Noncurrent assets: accounts receivable, futures

Liabilities

A liability is a financial obligation. Debt is a type of liability and is generally the most dangerous type. They can be a vital part of a company’s operations, in both day-to-day business and long-term plans.

• Current liabilities: Anything due within a year including accounts payable, interest payable, short-term loans and taxes payable.
• Long-term liabilities: Anything due in more than a year, including bonds payable, notes payable, deferred tax and mortgages. These might also appear on your business debt schedule.
• Contingent liabilities: An obligation that might happen, depending on the occurrence or outcome of another event, such as a lawsuit.

Equity

Equity is the money value of an owner’s interest in property after liabilities are accounted for. Lenders and other third parties typically have first claim on company assets. Exactly how this value is calculated can differ. Market value is the current price, which investors look at to predict its future value. Book value is the past price, used for simply recording history.

• Equity capital: preferred stock, common stock and treasury stock
• Retained earnings

Other formulas for assets, liabilities, equity

Owner’s equity formula

The owner’s equity formula is the accounting equation switched around: Equity = Assets – Liabilities

Net change formula

Net change is the difference in the price of a financial product over time. For example, if a stock is worth $30 in January and $50 in March, the net change is $20. The net change formula is: Net Change = New Value – Old Value.

Frequently asked questions

What are the 3 elements of the accounting equation?

The three elements of the accounting equation are assets, liabilities and equity.

Why is the accounting equation important?

The accounting equation represents the main concept underpinning modern accounting systems.

What is shareholders’ equity in the accounting equation?

Shareholders equity in the accounting equation is included as part of the total equity value.

Which of the following is not one of the three basic financial statements?

Which of the following best describes the information reported in the income statement?

Which of the following best describes the balance sheet?

Which element of the accounting equation represents the rights of owners?