Financial statements
Clear definitions and practical examples to help you understand the numbers and decisions.
Balance sheet
A balance sheet, also called a statement of financial position, reports a company's assets, liabilities, and equity at one date. Assets are resources the company controls; liabilities are present obligations; equity is the residual interest after liabilities. Its basic relationship is assets = liabilities + equity. Unlike an income statement, it is a snapshot, so a healthy year of profit does not automatically mean the company has enough cash or low debt on the reporting date.
Read the explanationIncome statement
An income statement, or statement of profit or loss, reports revenue earned and expenses incurred over a period, producing profit or loss for that period. It explains operating performance, not the timing of every cash movement. Revenue may be earned before collection, and an expense may be incurred before payment, so its bottom line must be read with the cash-flow statement and balance sheet.
Read the explanationStatement of cash flows
A statement of cash flows explains the change in cash and cash equivalents during a period by classifying cash movements as operating, investing, or financing activities. It answers where cash came from and where it went, complementing profit and the balance sheet. A movement can be economically important without appearing as current operating cash: buying equipment is investing cash, and borrowing is financing cash.
Read the explanationStatement of changes in equity
A statement of changes in equity explains how each component of owners' equity moved during a period. It typically reconciles opening balances, profit or loss, other comprehensive income, owner contributions, dividends or distributions, and transfers between reserves. It turns the ending equity figure on the balance sheet into a traceable story of what came from business performance and what came from owners.
Read the explanationNotes to financial statements
Notes to the financial statements provide the explanations, accounting policies, breakdowns, estimates, commitments, risks, and other disclosures needed to understand the primary statements. A total on the face of a statement is often too compressed to support a decision; the notes explain what the total contains and how it was measured. They are part of the financial statements, not optional background.
Read the explanationAssets
Assets are resources controlled by a business as a result of past events from which future economic benefits are expected. They can be cash, receivables, inventory, equipment, prepaid services, or intangible rights. Control and future benefit matter more than physical possession: an item held for another party may not be the company's asset, while a contractual right may be an asset even though it cannot be touched.
Read the explanationLiabilities
Liabilities are present obligations of a business arising from past events, the settlement of which is expected to require an outflow of resources. They include supplier payables, loans, accrued wages, tax obligations, and deferred income. A liability is not limited to an invoice already received: goods or services received, a financing agreement, or advance cash from a customer can create an obligation before a payment date arrives.
Read the explanationEquity
Equity is the residual interest in a company's assets after deducting liabilities. It commonly includes share capital, retained earnings, reserves, and sometimes accumulated losses. It represents the owners' claim on the business, but it is not the same as cash available for distribution: equity can be tied up in inventory, equipment, or receivables, and legal or contractual restrictions may limit distributions.
Read the explanationCurrent assets
Resources expected to be realised, sold, used, or converted to cash in the normal operating cycle or within twelve months, unless a longer cycle applies. Current assets commonly include cash, trade receivables, inventory, and short-term prepayments. The label describes expected timing, not certainty: an overdue receivable can still be current in classification yet carry a collection risk that needs allowance or disclosure.
Read the explanationNon-current assets
Non-current assets are resources not expected to be realised, sold, or consumed in the ordinary short-term cycle. They can include property, equipment, long-term investments, intangible assets, and long-term prepayments. The classification says the benefit is expected beyond the near term; it does not mean the asset is automatically valuable or immune from impairment.
Read the explanationCurrent liabilities
Current liabilities are obligations expected to be settled in the normal operating cycle or within twelve months, unless a longer cycle applies. They often include supplier payables, accrued payroll, short-term borrowing, taxes due, and the current portion of longer-term debt. They identify claims that can create near-term cash pressure, even where the related cost was recognised in an earlier period.
Read the explanationNon-current liabilities
Non-current liabilities are present obligations not expected to be settled in the normal operating cycle or within twelve months after the reporting date. They commonly include long-term loans, lease obligations, and certain long-term provisions. The amount due within the next year is normally considered separately as current, so a lender and management can see the near-term repayment burden.
Read the explanationShare capital
Share capital is the amount contributed by shareholders in exchange for shares, presented within equity according to the company’s legal and reporting structure. It represents owner funding, not revenue earned from customers and not a liability to repay simply because cash entered the company. The number of shares, class rights, issue price, and paid-up status can matter as much as the headline amount.
Read the explanationRetained earnings
Retained earnings are cumulative profits and losses that a company has kept in the business rather than distributed to shareholders, adjusted for transactions required by the reporting framework. They are an equity balance, not a cash reserve or a bank account. A profitable company can have retained earnings while its cash is tied up in receivables, inventory, or equipment.
Read the explanationAccumulated losses
Accumulated losses are the cumulative losses a company has incurred and not offset by accumulated profits or other equity movements. They reduce equity and signal that past operating results have consumed part of the owners’ residual interest. They are not the same as a current-year loss, and they are not automatically an amount of cash debt owed to someone.
Read the explanationOther comprehensive income
Other comprehensive income, or OCI, contains specified income and expense items that the applicable reporting standards require or permit to be presented outside profit or loss. It is still part of comprehensive income and usually accumulates in a separate equity reserve. OCI is not a discretionary second income statement and should not be used to keep an inconvenient cost away from operating performance.
Read the explanationConsolidated financial statements
Consolidated financial statements present a parent and the entities it controls as one economic entity. They combine assets, liabilities, income, expenses, and cash flows, then eliminate transactions and balances within the group so the statements show dealings with external parties. Control is the organising concept; legal ownership percentage alone may not answer every case.
Read the explanationGoing concern
Going concern is the assumption that an entity will continue operating for the foreseeable future and has neither the intention nor need to liquidate or cease trading. Preparing accounts on that basis requires management to assess available information about funding, cash flows, obligations, trading prospects, and material uncertainties. It is an evidence-based assessment, not an optimistic statement that the company expects to survive.
Read the explanationMateriality
Materiality is the threshold at which omitting, misstating, or obscuring information could reasonably influence a user’s decision based on the financial statements. It depends on amount, nature, and context; a small related-party transaction, breach, or fraud indicator can be material because of what it is, not only its value. Materiality is not permission to ignore errors below a percentage.
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