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Skip to 0 minutes and 13 seconds Financial statements are formal documents that report the financial position of a business or a public sector entity. Financial statements contain information about the composition of the wealth of a public sector organisation or a government, which is made up of assets that are owned by the entity, of liabilities that consist of debts of the entity, and of equity, that is the value of the organisation for its owners. Financial statements also provide information about the amount of new wealth that the entity produced in the past period, for example, in the last financial year.

Skip to 0 minutes and 56 seconds Financial statements are effectively a collection of documents. First, we have the balance sheet, which contains information about assets, liabilities and equity of an entity. Second, we have the income statement, which is also called the income and expenditure statement or profit and loss account. This provides information about the sources of income and the costs incurred in a period in the past. In addition, financial statements can include other documents, such as, for example, the cash flow statement, which offers information about how much cash has been received and has been paid by an entity in a period in the past.

Skip to 1 minute and 45 seconds Financial statements are created by accountants based on information they receive on the activities and transactions of an entity in a period in the past. Activities and transactions include, for example, revenue earned from sales, costs incurred from salaries and wages, money borrowed from a bank and money invested in equipment. All activities and transactions are recorded through bookkeeping techniques, so financial statements are summary reports of all these accounting records.

Skip to 2 minutes and 23 seconds Financial statements serve several purposes. They inform the owners of an entity about how well or badly the organisation has performed in the past in financial terms. On the basis of such information, the owners can decide, for example, whether they are happy with the present management team or not. Financial reports also provide information to various stakeholders. For example, they help creditors, such as banks, to assess whether the entity is financially solid.

What’s in a financial statement?

Let’s use this step to start to explore financial statements.

Here, Dr Alberto Asquer explains what they are and outlines a few general principles about their structure and contents.

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This video is from the free online course:

Understanding Public Financial Management: How Is Your Money Spent?

SOAS University of London