Understanding Financial Statements: A Guide for Non-Accountants
Feeling confused by a company’s financial statements with all the numbers and technical terms?
It’s normal to find them confusing at first.
These documents are really important because they give you a crucial understanding of how well a company is doing financially.
Whether you’re investing, running your own business, or simply curious about how companies manage their money, knowing how to read financial statements is essential.
Now, we’ll break them down so you can confidently read these documents and grasp what they reveal about a company’s finances.
Stick with us to learn more about these financial statements.
What is the purpose of the financial statement?
The purpose of financial statements is to clearly show how well a company is doing financially at a specific time.
They reveal how much money the company has made, spent, owns, and owes.
This helps investors, creditors, and managers understand the company’s profits, debts, and overall performance.
Financial statements are essential for making decisions about investments, loans, and business strategies.
They ensure everyone involved understands the company’s financial situation and can make informed choices based on reliable information.

Exploring Financial Statements
Starting with an overview, financial statements are detailed records of a company’s financial transactions and performance.
These documents give you a clear view of a business’s financial health, compiled on a quarterly and annual basis.
Here’s what each type of financial statement you need to know:
- Income Statement
The income statement gives you a clear picture of how much money a company has earned and spent over a set time, like a month, quarter, or year.
It shows if the company made a profit or lost money by subtracting all its expenses from its total revenue (money earned from sales).
This statement helps you see if the company’s business activities, like selling products or services, are making more money than it costs to run the business.
- Balance Sheet
The balance sheet gives a clear view of a company’s finances at a specific time.
It lists what the company owns (assets), what it owes (liabilities), and what’s left for shareholders (equity).
Assets are things like cash and property, while liabilities are debts and bills.
Equity shows how much would go to shareholders if everything was settled. - Cash Flow Statement
The cash flow statement reveals how money moves in and out of a business.
It tracks cash coming in from sales and other operations, going out for expenses like salaries and bills, and also how money is used for investments and paying debts.
Knowing this statement gives you insight into how well a company manages its cash to keep operations running smoothly and to prepare for future expansion.
It’s essential for understanding the financial health and stability of a company, showing how effectively it uses its funds to sustain and grow its business.

What is an Income Statement?
The income statement, often called the profit and loss statement, acts like a financial scoreboard for a company’s profitability.
It shows how much money the company earned from selling goods or services (revenue) and subtracts the costs directly related to making those sales (Cost of Goods Sold or COGS).
This gives the gross profit. Then, it deducts other expenses like salaries, rent, and utilities (operating expenses) to find the operating income.
Finally, after subtracting taxes and other expenses, it reveals the net income or net loss essentially, whether the company made a profit or loss during the period.
- Earnings
Earnings refer to the overall income that your company earns by selling its products or services.
It’s the cash that comes in from your sales.
This number represents the revenue generated by your business operations, indicating the amount customers are willing to pay for your offerings.
Tracking earnings can see trends over time and determine if your business is becoming more profitable or facing challenges that need addressing. - Production Costs
Production costs refer to the expenses incurred in producing the goods or services that your company offers.
These expenses include the cost of raw materials used in manufacturing and the wages paid to the workers involved in the production or delivery process.
Managing production costs effectively can ensure your operations run smoothly and efficiently.
This allows you to maintain competitive pricing while delivering quality products to your customers. - Total Profit
Total profit is the amount of money your company has left after subtracting production costs from its earnings.
It represents the income that remains before you have to pay other expenses, like rent, wages, and taxes.
This figure is crucial because it indicates how successful your business is at generating revenue beyond what it costs to make your products or provide your services.
It’s a key indicator of your business’s financial performance and its ability to generate surplus income.
- Day-to-Day Costs
These are the regular expenses involved in running your business daily.
These expenses include payments for staff wages, rent or mortgage payments for your premises, utility bills such as electricity and water, and other operational costs like office supplies and maintenance fees. - Profit from Operations
This is the money that remains after subtracting day-to-day costs from your total profit.
It represents how successful your core business activities are at generating income, once all regular expenses like wages, rent, and bills are covered.
This figure is crucial because it shows the profitability of your main business operations before accounting for other costs like taxes and interest payments. - Final Profit
The amount of money that remains after subtracting all costs, including taxes, from the total income generated by the company.
It provides a clear picture of how well the company is doing financially overall.
This figure indicates the true profitability of the business after all expenses have been accounted for, showing whether the company is making a profit or facing a loss.
Purpose of a Balance Sheet
When you look at a balance sheet, you get a clear view of how well a company is doing financially at a particular time, usually at the end of a three-month or yearly period.
There are three main parts to a balance sheet:
- Assets
Assets are the things a company owns that hold value, like cash, inventory (goods it has ready to sell), and property (buildings or land).
They are the resources a company uses to operate and make money.
When you see the assets listed on a balance sheet, it gives you a picture of what the company has that can be turned into money or used to grow the business.
- Liabilities
These are the debts and things the company has to pay back to others.
It could be loans from banks, money owed to suppliers for goods bought, or bills that haven’t been paid yet.
Liabilities show all the money the company owes to different people or businesses.
- Equity
This is how much of the company’s value belongs to its owners, known as shareholders.
It’s calculated by subtracting what the company owes (liabilities) from what it owns (assets).
Essentially, equity shows how much of the company’s assets would be left over for shareholders if all debts were paid off.
Essentials of Cash Flow Statements

The cash flow statement gives you a detailed look at how money moves in and out of a company.
While the income statement shows if a company is making a profit and the balance sheet reveals its financial standing, the cash flow statement focuses on actual cash transactions.
It categorises these transactions into three main types:
- Operating Activities
Operating activities cover the everyday money movements in a business.
It’s about the cash coming in from sales and going out for things like paying staff and covering rent and bills.
Essentially, it shows how well a company manages its core operations to generate cash flow and keep the business running smoothly. - Investing Activities
Investing activities are all about the money coming in and going out when a company buys and sells things it needs to run the business.
This could be buying new equipment or making investments in other companies. It’s about using money to get things that help the business grow and operate better. - Financing Activities
Financing activities are all about how a company raises money to keep running or pay off debts.
This includes things like borrowing money from banks, getting cash from investors by selling shares, or giving out profits to shareholders as dividends.
It shows how the company manages its financial obligations and supports its operations.
Why Financial Statements Matter
Financial statements are really important because they give you key information to make smart decisions.
Investors look at them to see if a company is doing well financially before investing money.
People who lend money look at them to see if a company can pay back loans.
Managers use them to see how well the company is doing and to plan for the future.
Even if you’re just interested in a company, looking at financial statements can help you decide if it’s a good idea to buy from or work with that company.
Outsourcing Finance
For non-accountants or small business owners, dealing with financial documents can be tough.
Outsourcing finance can help.
Hiring experts ensure your financial statements are accurate and useful.
This lets you focus on running your business while professionals handle the numbers.
It’s a cost-effective way to get peace of mind and make smart financial decisions without becoming an expert yourself.
Is it important for non-accountants to understand how to read financial statements?
Yes, non-accountants need to understand how to read financial statements.
These documents give you a clear view of a company’s economic performance.
Whether you’re considering investing in a company, working for one, or even just buying products from it, understanding financial statements helps you make informed decisions.
It allows you to see if a company is making a profit, how much money it owes, and how much money it has.
How We Present Financial Statements to You as a Non-Accountant
We explain financial statements in simple terms to make them easy to understand.
First, we introduce each statement (income statement, balance sheet, cash flow statement) and explain why they matter.
We use clear headings for each section and focus on key numbers like sales, costs, and money owed.
We avoid technical words and explain any terms that might be confusing. Charts or graphs help show trends.
And most importantly, we encourage questions to ensure everyone understands.
Mastering Company Finances with Red Fish Accountancy
Financial statements are important documents that show how well a company is doing financially and how it operates.
Learning about income statements, balance sheets, and cash flow statements helps you understand businesses better.
This knowledge helps you make smart choices, whether you’re investing, running a business, or simply interested in finances.
Knowing them well prepares you to manage the business world more effectively.
Let us help you interpret and understand financial data effectively, and you’ll be equipped to make informed financial decisions with confidence.