Financial statements are the structured reports a business produces at the end of an accounting period to show how it performed and where it stands. The full set is the income statement, the balance sheet, the cash flow statement, the statement of changes in equity and the notes that explain them. Annual financial statements are often abbreviated AFS.
What it means
The statements turn the running balances in the ledger into a picture an owner, lender, investor or SARS can read. The income statement shows profit or loss over the period, the balance sheet shows what the business owns and owes at a point in time, and the cash flow statement shows where cash actually came from and went. Together they have to articulate - the profit retained flows into equity on the balance sheet, and the cash movements reconcile to the bank.
Where it fits in
Payroll is usually one of the largest expenses on the income statement and leaves statutory liabilities (PAYE, UIF, SDL owed to SARS) sitting on the balance sheet until paid. Accurate payroll accounting each pay run is what lets these statements reflect the true cost and obligations of employing people.
Key rules
- The set is income statement, balance sheet, cash flow statement, statement of changes in equity and notes.
- Prepared in South Africa under IFRS or IFRS for SMEs depending on the entity.
- The statements interlock - profit flows to equity, equity and assets balance, cash reconciles to the bank.
- Payroll cost and statutory liabilities must be fully reflected before the statements are finalised.
