Financial statements

It is often helpful to split up funds within a business to show sources and applications. Sources show from where the money has come; applications show to where the money has gone.

Note that receipts and payments are different to income and expenditure.

There are three basic financial statements which describe the activities and financial state of any business and are used, though with slightly differing layout, all over the world:

• The profit and loss account (P&L) shows how a business performed over a specific period and reveals the total revenue and total expenditure related to that period.
• The balance sheet summarises the state of a business at a specific date. Balance sheets are linked by a P&L which covers the period between the two dates.
• The cash flow statement shows cash receipts to and cash payments from the business. A forecast of cash flow is one of the most important management accounting tools. It provides an estimate of the business’s cash requirements for the next trading period.