What is Financial Statements?

Financial statements are formal records of the financial activities and position of a business, person, or other entity. They provide an overview of an entity’s financial condition in both short and long term. For a UK audience, financial statements typically include the following primary documents: the balance sheet, the profit and loss account (or income statement), and the cash flow statement.


Key Financial Statements in the UK:

  1. Balance Sheet:
    • Purpose: The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the owner’s equity (or shareholder’s equity).
    • Components:
      • Assets: Resources owned by the company, including current assets (cash, accounts receivable, inventory) and non-current assets (property, plant, equipment, and intangible assets).
      • Liabilities: Obligations the company needs to pay, including current liabilities (accounts payable, short-term loans) and non-current liabilities (long-term debt).
      • Equity: The residual interest in the assets of the company after deducting liabilities. It includes share capital, retained earnings, and reserves.
  2. Profit and Loss Account (Income Statement):
    • Purpose: This statement shows the company’s financial performance over a specific accounting period, usually a year. It details how much revenue the company generated and the costs and expenses incurred to generate that revenue.
    • Components:
      • Revenue: Income earned from the company’s primary business activities.
      • Cost of Goods Sold (COGS): Direct costs attributable to the production of the goods sold by the company.
      • Gross Profit: Revenue minus COGS.
      • Operating Expenses: Costs incurred in the normal course of business, such as wages, rent, and utilities.
      • Operating Profit: Gross profit minus operating expenses.
      • Net Profit: The final profit after all expenses, including taxes and interest, have been deducted from revenue.
  3. Cash Flow Statement:
    • Purpose: The cash flow statement shows how changes in the balance sheet and income affect cash and cash equivalents. It breaks the analysis down to operating, investing, and financing activities.
    • Components:
      • Cash Flow from Operating Activities: Cash generated or used in the core business operations.
      • Cash Flow from Investing Activities: Cash used for or generated from investments, such as purchasing or selling assets.
      • Cash Flow from Financing Activities: Cash flows related to borrowing, repaying loans, issuing shares, and paying dividends.

Additional Components:

  1. Statement of Changes in Equity:
    • Purpose: This statement shows the changes in the company’s equity during the reporting period. It includes details about new shares issued, dividends paid, and any other changes in equity.
  2. Notes to the Financial Statements:
    • Purpose: These provide additional detail and context to the figures presented in the main financial statements. They can include accounting policies, explanations of specific items, and any additional information required by accounting standards.

Key Considerations for a UK Audience:

  1. Regulatory Framework:
    • Accounting Standards: In the UK, financial statements are prepared in accordance with the UK Generally Accepted Accounting Principles (UK GAAP) or International Financial Reporting Standards (IFRS), depending on the company’s size and whether it is publicly listed.
    • Filing Requirements: Companies House is the UK’s registrar of companies. All UK companies are required to file their annual financial statements with Companies House.
  2. Director’s Report:
    • This report accompanies the financial statements and includes an overview of the company’s performance, significant events, and future prospects. It is a requirement for most UK companies.
  3. Audit Requirements:
    • Audited Financial Statements: Many companies, particularly larger ones, are required to have their financial statements audited by an independent auditor to provide assurance that they give a true and fair view of the company’s financial position.


Financial statements are crucial tools for understanding the financial health and performance of a company. For a UK audience, it is important to be familiar with the components and regulatory requirements specific to the UK, such as UK GAAP or IFRS, filing requirements with Companies House, and the necessity of audits for certain companies. These statements provide valuable insights for stakeholders, including investors, creditors, regulators, and management.