Financial statements include the balance sheet, income statement, statement of cash flow and statement of retained earnings. As a business owner, you're responsible for making sure these reports get done, especially if you own an LLC or corporation or if your company is publicly traded. These reports can also help you understand where your business stands.

The balance sheet will help you figure out exactly what assets and liabilities you have. The income statement shows your net income. The statement of cash flow shows where your money is going, and the statement of retained earnings shows how much you pay out in dividends. There are a few ways to go about creating and using financial statements:

1. Download templates from the Internet if you're certain you know how to make an accurate corporate financial statement.

2. Consider buying financial statement software to help you out. These programs are easy to use and are great for owners on any budget.

3. Hire an accountant if you have no idea what you're doing. You can be sure these professionals will provide you with accurate financial reports.

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Find online financial statement forms to use as templates

If you need a little bit of guidance but aren't quite sure how to create your own financial statements, there are quite a few sources of templates you can use. You can either download a template and use it as a guide to make your own statements, or you can just find one that suits your needs, fill it out and print it up.

I recommend: Check out the large selection of free templates available from Microsoft. Docstoc also has a nice variety. These are good if your company uses Microsoft Excel.

Take a more high-tech approach with financial statement software

If you want to use a software program to help manage your finances, look for one that has financial statements included. Many of these software programs will generate statements for you if you keep up with inputting your financial information.

I recommend: Compare Peachtree accounting products at Sage Software, which offers solutions for every budget. Intuit also offers great software with its QuickBooks line.

Delegate annual financial report creation to a third party

Accountants are great for keeping up your books year round, but at the end of your fiscal year, these professionals can help you immensely, especially if your business is incorporated. There is lots of paperwork to be done at the end of the year, including creating all your financial statements and submitting them to the proper places.

I recommend: Locate an accountant in your area using AccountantsWorld or CPAWeb.net.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  If you're fairly confident in making your own financial statements but want some reassurance, take them to an accountant and have him or her perform a financial statement analysis. This will ensure that your statements are ready for investors, creditors or shareholders to view.

A bookkeeping system is essential for any business, no matter how small. You have several options in setting up a basic bookkeeping system. The five basics of a bookkeeping system are:

1. Check register that records each check, much like a personal checking account.
2. Cash-receipts account that tracks incoming money.
3. Sales journal that shows each business transaction, what business took place, the amount of the invoice and the sales tax.
4. Voucher register that records bills, money owed, the date of bill, who it is from and what service was given.
5. General journal that allows you to adjust the entries in the other four registers.

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Computerized systems do the math easily and accurately

Most small businesses choose software over manual bookkeeping systems. For about $200 or less, you can get a good package for your startup business. Don't buy a system that's too complex, but also avoid a system that will have to be replaced in two or three years when your business has grown.

I recommend: Find a directory of bookkeeping software on Business.com. See reviews and a handy comparison chart of bookkeeping software at CNet.

Paper systems are convenient for very small businesses

If you're just starting your business, a manual, or paper, bookkeeping system may be the way to go.

I recommend: Business Owner's Toolkit has sound, plain-English advice on basic bookkeeping for a small business. You'll find details on the important of good records, accounting system essentials, how to record daily transactions, preparing financing statements and much more. Also check out advice from accounting firm Miller, Bahr & Wills on the basics of a setting up a bookkeeping system for your small business.

Single-entry is simple and straightforward

Single-entry is the simplest way to set up a bookkeeping system. Transactions are listed as a single transaction - not as a debit and credit, as is done in a double-entry system.

I recommend: Infoplease and Ohio State University discuss single- versus double-entry systems. FindArticles details the differences between the two.

Double-entry allows you to track more data

Most larger businesses use double-entry bookkeeping, as single does not give detailed information about the source of the gain or loss. Double-entry bookkeeping gives a business a detailed picture of its true financial position, not just its cash position.

I recommend: The Happy Accountant discusses the advantages of double-entry bookkeeping. The same site also details disadvantages to this system.

When in doubt, call in a professional

If all this talk of computers vs. paper and single- vs. double-entry seems daunting, don't hesitate to call in a professional to help you set up or maintain your bookkeeping system. The services can be relatively inexpensive and setting up a good bookkeeping system is critical to the success of your business.

I recommend: Talk to fellow small-business owners for referrals, or find a bookkeeping service in your area through Bookkeepinghelp.com.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Even if you choose a computer program for bookkeeping, you still have to maintain appropriate backup paper files. Those should include paid invoices and receipts from vendors, purchase orders, paid bills and deposit records from customers.
• •  Maintain a clean audit trail of information.
• •  Record the date paid, check number and amount paid on each invoice you pay.
• •  Keep a copy of each check received from customers and attach that to deposit slips so you have a record of each payment received.
• •  Keep as detailed a record as possible of the invoices sent to customers, and the outstanding amounts due.

Even if your business is a small one, it's a good idea to prepare financial statements. Businesses that are independent entities (LLCs, corporations, etc.) must prepare an annual financial report and answer to stockholders, so financial reports are even more important for these companies. You must prepare these statements properly; they are the only way to communicate your company's true financial standing.

Generally Accepted Accounting Principles (GAAP) are the rules set forth by the U.S. Securities and Exchange Commission, and it's imperative that you follow these principles when creating any of your business financial statements. There are four main types of statements to familiarize yourself with:

1. Balance sheets: This type of corporate financial statement shows the assets and liabilities of a company. It also shows owner's equity.

2. Income statements, also known as profit and loss statements (P&Ls): This type of statement indicates net income.

3. Statements of cash flow: This type financial statement shows all the business's cash inflow and outflow.

4. Statements of retained earnings: Public company financial statements should include this type, but it's not necessary for privately held businesses.

Action Steps
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Create one of the most important aspects of financial statements basics: the balance sheet

The balance sheet is one of the two main financial statements used to measure the health of a business. It categorizes all assets and liabilities and shows the net worth of the company. It also includes owner's equity. The general equation used in the balance sheet is Assets = Liabilities + Shareholders' Equity. Industry professionals refer to the balance sheet as a snapshot, since it only represents these things at a single point in time, usually at the end of the fiscal year.

I recommend: Find out how to create a balance sheet at Virtual Advisor, which includes a sample balance sheet. The sample at Vertex42 will give you an idea of what your balance sheet should look like.

Show your profits and losses by creating an income statement

The income statement is the other main financial statement you'll need to know about. The P&L lists all sources of income as well as every expense category. Net income is calculated from these figures. The income statement represents a certain period of time; for example, revenue and expenses from January through March. You can create this statement for any time period, although quarterly statements are the most common.

I recommend: Download one of the financial statement forms at docstoc; you can use it as an example to make your own or fill it out as is. TD AMERITRADE offers a nice explanation for the different components of the income statement.

Attain investors with the cash flow financial statement

The statement of cash flows is actually very simple. It states the cash flow into and out of the business for a certain period of time (quarterly or annually, usually). Information is divided into operating activities, investing activities, financing activities and supplemental information (income taxes and interest paid). The main point of the statement of cash flows is to show investors that the company has significant liquidity.

I recommend: Check out the different aspects of the cash flow statement at IBM. The sample at Business Resource Software will help you figure out how to create your own.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  The statement of retained earnings shows how much net income a company retains within it after dividends are paid to stockholders. It is the fourth financial statement governed by GAAP but is not used unless a company is publicly traded. The equation to calculate retained earnings is Ending Retained Earnings = Beginning Retained Earnings - Investments - Dividends Paid + Net Income.
• •  If you need some help making your financial statements, there are quite a few financial statement software programs you can choose from. Some of them are meant to be used on a regular basis and will automatically generate financial statements. Basic programs will at least include a template you can use.

Financial statements help business owners understand where their businesses stand. For your business, you can either do this yourself or hire an accountant to do it for you. Either way, if your business is a corporation, a limited liability company or publicly traded, having good financial statements is an absolute necessity.

If you decide to do your own financial statements there are a number of software programs that you can use to do so. If you hire an accountant to do it for you, becoming savvy about all the different terms will help you understand how well your business is doing.

Action Steps
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Balance sheet

A balance sheet is a key part of a financial statement. In financial accounting terms, this is a statement or summary of a business' assets, liabilities and ownership equity. Usually it is a snapshot taken on a specific date and it gives a business owner a good idea of where the business stands financially.

I recommend: BusinessTown.com offers an excellent definition of balance sheets, along with examples of the items typically found on a balance sheet.

FASB

FASB stands for the Financial Accounting Standards Board. The FASB is a private, not-for-profit organization that develops generally accepted accounting principles (GAAP)in the United States. Financial statements follow FASB guidelines.

I recommend: You can find out all about the FASB at the organization's website.

Accounts receivable

Accounts receivable (sometimes written A/R) consists of the total amount that customers owe for goods and services. Financial statements should always include an accounts receivable section.

I recommend: For an in-depth discussion of the accounts receivable topic, go to the Business Owner's Toolkit website.

Revenue recognition

Revenue recognition is a key element of accounting and determines the accounting period in which expenses and revenues are recorded. Financial statements include the principle of revenue recognition.

I recommend: AllBusiness.com explains revenue recognition and some related terms.

Inventory turnover

Inventory turnover, usually expressed as an equation, is the sales total divided by the inventory, although sometimes it's expressed as the cost of goods sold divided by the average inventory. Financial statements should factor in inventory turnover, which can help to determine the profitability of an enterprise.

I recommend: Investopedia offers more details about inventory turnover.

Leverage

Leverage is basically how much borrowed money a business is using, as a percentage of its total finances. Financial statements help a business owner determine how much leverage it has.

I recommend: InvestorWords defines leverage in simple terms.