For any given business, success is reflected in their financial documents. Companies, including small enterprises, use financial documents to provide standard reports, the most common of which are the balance sheet and the income statement.
There are several types of financial documents, all essential in accounting processes and for analyzing the financial performance of the business from one period to another.
Here are the top 10 most important financial documents. Read on to find out what they are and how vital each is to businesses.
- The Balance Sheet
- The Income Statement
- Cash Flow Statement
- The Annual Report
- Statement of changes in equity
- Tax return
- Receipt
- Invoice
- The Cash Memo
- Bank Statement
1. The Balance Sheet
The Balance Sheet is one of the most important and frequently used financial documents. Prepared periodically, balance sheets assess all that a company owns, owes, and its net worth. In accounting or financial bespoke, these details relate to assets, liabilities, and shareholders’ equity in that order.
In a balance sheet, the assets should be equal to the sum of the company’s liabilities and shareholder’s equity. Thus, Assets= Liabilities+ Shareholder’s Equity.
The balance sheet is used to give an overview of a company’s books in terms of its assets, liabilities, and shareholders’ equity. The document cannot be used to show a company’s flows.
2. The Income Statement
An income statement is a financial document that reports on a company’s revenue as recorded over a given period. This document indicates how much profit or loss the company has made over the specified period. In this case, the Income Statement is thus a profit/loss statement.
Other details you can glean from the document are an overview of costs and expenses involved as well as a snapshot of the company’s earnings per share (EPS).
Income statements involve calculations on sales (gross revenue), operating expenses, net revenues,
Cost of goods sold, gross margin or gross profit, and net income or loss. The document also shows figures related to depreciation and income tax expenses.
3. Cash Flow Statement
The cash flow statement is a financial report that shows a company’s performance in terms of cash inflows and outflows.
The cash flow statement is useful because investors looking at the document can tell if the business generates cash and how cash at hand reflects on productivity.
Accountants use data from the company’s other financial documents to construct the cash flow statement to give an outline of operating, investing, and financing activities.
4. The Annual Report
The annual report is a yearly publication that companies release to detail the company’s fiscal year. This document comes out well after the fiscal year ends and provides investors with all the financial and business information they need.
An annual report will usually be prepared before annual general meetings and sent to shareholders.
The report contains a summary of the company’s financial performance in the foregoing fiscal year. The document also gives earnings outlook as well as attachments of other crucial financial statements and disclosures.
Most companies post a PDF format of the report on their website, meaning that it’s accessible even to non-investors.
5. Statement of changes in equity
The statement of changes in equity is a recurring document that tracks the net worth of the business and how that changes over time.
Also called a ‘Statement of Retained Earnings,’ the document reports on such changes as shown in share capital- issuance or purchase-, payment of dividends, and net profit or loss as shown in the income statement.
The above documents make up the top five financial documents for businesses. However, they are not the only ones used recurrently by businesses. Here below are five more financial documents that companies prepare or use regularly.
6. Tax return
The tax return is a document a business files with a tax authority detailing information like income and expenses.
This document allows you to prepare, schedule, and submit tax payments. Companies must file their tax returns annually. The form contains details such as filing status and will show three areas:
An income section that requires companies to disclose all their sources of income
A deductions section that companies use to decrease their tax liability. For businesses, these deductions relate to operating expenses.
The third section is the tax credits. Here companies itemize amounts that it can use to offset tax liabilities. Tax return requirements and filing processes vary from one jurisdiction to another. It’s important to liaise with the local tax office to find out as much as possible.
7. Receipt
The receipt is another of the most used financial documents. It is a source document from which businesses transfer financial information to the main financial documents.
A receipt is a ‘proof of payment’ document that indicates what goods or services were offered and how much was paid in return.
The document is issued in duplicate, with the second party getting the original copy while the business files the duplicate as proof.
8. Invoice
The invoice is a financial (accounting) document that a business sends to a purchaser or entity to which the seller provides a service. It sets out a kind of obligation for the buyer who agrees, on receipt, to pay for the goods or services. The agreement helps businesses create and use Accounts Receivable and Account Payable.
An invoice is important when it comes to bookkeeping and accounting as it provides a record of all sale transactions. While paper invoices are still in use, most jurisdictions have legislation that requires e-invoicing.
9. The Cash Memo
The cash memo is one of the most used financial documents businesses use. It is a source document, meaning it provides details required when preparing other financial documents.
Whenever a sale or purchase happens, the information is recorded in a cash memo. Here financial transaction details such as sales (quantity), prices, sales tax, and so on are recorded. These details also form part of the information in a general ledger.
When auditing books of accounts, the auditor takes time to confirm and cross-reference contents of the cash memo and cash vouchers.
10. Bank Statement
A bank statement is one of the most recurring financial documents businesses use. Although largely used with banking, the statement is crucial as it summarizes a business’ bank account transactions.
Bank statements are prepared every month, with the information provided key to showing how the business handled its account during a given reporting period.
Along with other financial documents, the statement can be crucial when it comes to balancing books of accounts and generating other reports.
Conclusion
Most financial documents are critical to the running of companies and businesses. As well as showing the financial position and performance of the company, they provide vital information to investors, credit facilities, and other lenders. They help businesses handle regulatory requirements, including compliance.
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