Bookkeepers make sure your business runs like a well-oiled machine. They can tackle your payroll, pay all of your bills on time, and spot accounting errors. Once you work with a professional bookkeeper, you’ll wonder what you ever did without one.
Among the most important tasks of a bookkeeper is keeping the records your essential reports are built from. The four core financial statements are the income statement (profit and loss), the balance sheet, the cash flow statement and the statement of changes in equity (sometimes called the statement of owner’s equity for sole traders and partnerships). A full set under AASB 101 also includes the notes. Combined, they reveal the financial health of your business.
Who prepares what varies. A bookkeeper typically produces the monthly profit and loss and balance sheet from your accounting software as management reports. Year-end financial statements for tax returns, lenders or, for the few companies that must lodge them, ASIC are usually finalised by your accountant, who may also prepare the cash flow statement and statement of changes in equity. Three of the four (the income statement, cash flow statement and statement of changes in equity) cover a period of time; the balance sheet is a snapshot of a single date.
The four financial statements and what they are for
Financial reporting serves a few key purposes for any business. Accurate reports allow your business to:
- Understand the current assets and debts for your business.
- Identify positive or negative trends in revenue and spending.
- Make informed decisions about how fast to scale up.
- Know when you can and can’t afford to hire new staff.
- Provide concrete financial numbers to provide to potential investors.
The four statements, and the records your bookkeeper keeps behind them, are outlined below. Are you familiar with these bookkeeping reports? You should be.
Income statement
An income statement, sometimes called a profit and loss statement, tells you what you spent versus what you earned in a particular time period. The report usually has two main headings: revenue and expenses. If revenue exceeds expenses, the bottom line is a net profit; if not, a net loss. Profit is not the same as cash: services already delivered or goods whose control has transferred can create revenue before you receive cash. Revenue follows satisfaction of the performance obligation; issuing an advance invoice can instead create a contract liability. An unpaid invoice is not cash in the bank.
You can create an income statement over any period of time. Many businesses do them monthly, quarterly, and/or annually. By comparing income statements from different time periods, you can begin to understand important trends. When are your costs the highest? During which months do you have the most sales? Your bookkeeper will have plenty to analyse.
The income statement shows whether you earned more than you spent during a particular period of time. You also want to use what you learn from an income statement to figure out where you can cut costs and generate more revenue to increase your net profit.
Balance sheet
A balance sheet answers a different question from an income statement. Instead of covering a period, it shows the position of your business at a specific point in time, such as close of business on 30 June. More specifically, a balance sheet outlines your total assets, total liabilities, and total shareholder equity on the day you create the report.
Your assets include the cash in your bank account, money customers owe you (accounts receivable), stock, equipment and property: resources the business controls that are expected to bring future benefit. Liabilities are what the business owes, such as unpaid supplier bills, GST and PAYG owing, employee entitlements and loan balances, whether due soon (current) or later (non-current). Equity is what is left for the owners after liabilities are subtracted from assets. It is made up of the capital the owners put in plus profits kept in the business, less any losses and drawings or dividends.
Balance sheets have two sides. On one side, you list total assets. On the other, total liabilities and equity. The two sides must be equal: Assets = Liabilities + Equity.
Your balance sheet reveals how liquid your business is, how efficiently you are using your assets, and whether you have any financial wiggle room to have a bad quarter. Over time, you want the balance sheet to show equity growing. Equity grows when the business keeps profits or the owners put in more capital. Paying down a loan with cash does not change equity on its own: it reduces cash (an asset) and the loan (a liability) by the same amount.
Statement of cash flows
A business can be profitable on paper and still run out of cash, which is why the cash flow statement is one of the most important pieces of financial reporting you will see. It tracks the inflow and outflow of cash and cash equivalents for your business over a period.
Read More: What is a cash flow statement?
Your cash flow statement usually has three main sections: operating activities, investing activities, and financing activities. Operating cash flow relates to your core business: cash received from customers and paid to suppliers, staff and the ATO. Investing cash flow covers buying or selling equipment, property and other long-term assets. Financing cash flow covers borrowing and repaying loans, owner contributions, and drawings or dividends. (Interest paid can be shown under operating or financing activities today; from 2027 reporting periods, AASB 18 requires most companies to show it under financing.)
The goal of a cash flow statement is to explain how your cash balance moved from the start of the period to the end, and where the cash came from and went. You can produce a cash flow statement as often as you think is relevant, though likely not more than once a month.
Statement of changes in equity
Owner’s equity is the owners’ share of the business’s net assets on the balance sheet. If your business has assets of $100,000 and liabilities of $50,000, equity is $50,000. A statement of changes in equity (sometimes called the statement of owner’s equity for sole traders and partnerships) explains the changes to the equity section of your balance sheet over a period.
The statement starts with the opening equity balance for the period. It adds net profit (or subtracts a net loss) and any capital the owners contributed, then subtracts owner drawings or dividends. This leaves the closing equity balance, which matches the balance sheet at the end of the period.
The goal of your statement of changes in equity is to determine if your equity is trending up or down. If equity has fallen, the statement shows whether losses or drawings caused it.
Getting help with your financial reporting
There are many benefits to regular financial analysis. Reporting helps you identify your liquidity, spot positive or negative trends, and incentivise investors to consider your business. As your business grows, it’s difficult if not impossible to keep up with your reports without a dedicated bookkeeper. You might review these statements monthly or quarterly, but they are only as good as the daily transactions and invoices recorded behind them.
Visory runs bookkeeping, payroll, accounts payable and receivable for growing businesses, with a dedicated team and its AI, Delphi, overseen by that team. The team closes your books each month so the profit and loss and balance sheet are current. Through Visory Insights, a Business Performance Partner then walks you through what the numbers mean and what to do next. Book a discovery call.
About this article
Written by The Visory Team. Published . General information for Australian businesses, not advice for your situation.
