Financial Statements

Financial Statements Glossary: Understanding Key Terms

Financial Statements Glossary

Financial statements are an important tool for understanding the financial health of a company. They provide valuable information about a company's performance, including its revenue, expenses, and profits. However, understanding financial statements requires a basic understanding of the terminology used.

In this article, we will provide a glossary of key terms related to financial statements, with examples.

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Balance Sheet: A balance sheet is a financial statement that shows a company's assets, liabilities, and equity at a specific point in time. It is often referred to as a "snapshot" of a company's financial position.

Example: XYZ Company's balance sheet shows that it has SAR 10,000 in assets, SAR 5,000 in liabilities, and SAR 5,000 in equity.

Income Statement: An income statement is a financial statement that shows a company's revenues, expenses, and net income over a specific period of time. It is often referred to as a "profit and loss statement."

Example: ABC Company's income statement shows that it had SAR 20,000 in revenue, SAR 10,000 in expenses, and SAR 10,000 in net income for the month of January.

Cash Flow Statement: A cash flow statement is a financial statement that shows the cash inflows and outflows of a company over a specific period of time. It provides information about a company's operating, investing, and financing activities.

Example: PQR Company's cash flow statement shows that it had SAR 15,000 in cash inflows from operating activities, SAR 5,000 in cash outflows from investing activities, and SAR 10,000 in cash inflows from financing activities for the year ended December 31st.

Assets: Assets are resources that a company owns and can use to generate revenue. Examples of assets include cash, inventory, property, and equipment.

Example: XYZ Company's assets include SAR 5,000 in cash, SAR 3,000 in inventory, and SAR 2,000 in equipment.

Liabilities: Liabilities are obligations that a company owes to others, such as loans, accounts payable, and taxes.

Example: ABC Company's liabilities include SAR 2,000 in loans, SAR 2,000 in accounts payable, and SAR 1,000 in taxes.

Equity: Equity represents the portion of a company's assets that is owned by its shareholders. It is calculated as assets minus liabilities.

Example: PQR Company's equity is SAR 15,000, calculated as SAR 20,000 in assets minus SAR 5,000 in liabilities.

Gross Profit: Gross profit is the revenue that a company earns minus the cost of goods sold. It represents the profit earned from the production and sale of goods or services.

Example: XYZ Company's gross profit for the year ended December 31st is SAR 8,000, calculated as SAR 20,000 in revenue minus SAR 12,000 in cost of goods sold.

Net Income: Net income is the profit that a company earns after all expenses have been deducted from revenue. It represents the bottom line of a company's income statement.

Example: ABC Company's net income for the year ended December 31st is SAR 5,000, calculated as SAR 10,000 in revenue minus SAR 5,000 in expenses.

In conclusion, understanding the terminology used in financial statements is crucial for making informed decisions about a company's financial health. The glossary provided above is a starting point for developing a deeper understanding of financial statements.

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