SMALL BUSINESS FINANCE 6: RELATIONSHIPS AMONG THE BALANCE SHEET, THE INCOME & CASH FLOW STATEMENTS

Most small businesses, usually because there is no accountant and the proprietor himself does the accounting, stop at the Income Statement. Because most or all of the transactions are in Cash, the Income Statement is also made to serve the purposes of a Cash Flow Statement. However, you cannot really tell the true worth of a business without a Balance Sheet.

An Income Statement may show high Sales figures (but you wouldn’t know how much of it is in Cash) and a Cash Flow Statement may show a generous Ending Cash (but you wouldn’t know how much of it would be needed to pay Accounts Payable or Loans). If you don’t know how much the business owes (Liabilities from the Balance Sheet), you don’t really know how much of the business you really own.

As the basic accounting equation declares:

Assets = Liabilities + Equity or Assets – Liabilities = Equity.