Financial statements are formal records of a business’s financial activities and position. They provide a snapshot of your business health and are essential for decision-making, tax compliance, and securing financing. For Pakistani business owners, understanding these statements is crucial for managing growth and meeting FBR requirements.
This guide explains the three main financial statements in simple terms, with practical examples relevant to Pakistani SMEs.
What Are Financial Statements?
Financial statements are standardized reports that summarize your business’s financial data. The three primary statements are:
- Balance Sheet – What you own and owe at a point in time
- Income Statement (P&L) – How much you earned over a period
- Cash Flow Statement – How cash moved in and out
Together, these statements tell the complete story of your business finances.
The Balance Sheet Explained
The balance sheet shows your business’s financial position at a specific moment—like a photograph of your finances on a particular date.
The Balance Sheet Equation
Assets = Liabilities + Owner's Equity
What you OWN = What you OWE + What's LEFT for ownersAssets (What You Own)
Current Assets (can be converted to cash within one year):
- Cash in bank and on hand
- Accounts receivable (money customers owe you)
- Inventory/stock
- Prepaid expenses (rent paid in advance)
Fixed Assets (long-term assets):
- Property and buildings
- Vehicles
- Equipment and machinery
- Furniture and fixtures
- Less: Accumulated depreciation
Liabilities (What You Owe)
Current Liabilities (due within one year):
- Accounts payable (money you owe suppliers)
- Short-term loans
- Accrued expenses (salaries due, utilities)
- GST/taxes payable
- Current portion of long-term debt
Long-term Liabilities:
- Bank loans (beyond one year)
- Vehicle financing
- Property mortgages
Owner’s Equity
- Capital invested by owner(s)
- Retained earnings (accumulated profits)
- Less: Drawings (money taken out by owner)
Sample Balance Sheet
| ABC Trading Company – Balance Sheet as of December 31, 2024 | |
|---|---|
| ASSETS | |
| Cash in Bank | PKR 500,000 |
| Accounts Receivable | PKR 800,000 |
| Inventory | PKR 1,200,000 |
| Total Current Assets | PKR 2,500,000 |
| Equipment (net of depreciation) | PKR 600,000 |
| Vehicle (net of depreciation) | PKR 400,000 |
| Total Fixed Assets | PKR 1,000,000 |
| TOTAL ASSETS | PKR 3,500,000 |
| LIABILITIES | |
| Accounts Payable | PKR 600,000 |
| GST Payable | PKR 100,000 |
| Short-term Loan | PKR 300,000 |
| Total Current Liabilities | PKR 1,000,000 |
| Bank Loan (Long-term) | PKR 500,000 |
| TOTAL LIABILITIES | PKR 1,500,000 |
| OWNER’S EQUITY | |
| Capital | PKR 1,500,000 |
| Retained Earnings | PKR 500,000 |
| TOTAL EQUITY | PKR 2,000,000 |
| TOTAL LIABILITIES + EQUITY | PKR 3,500,000 |
The Income Statement (Profit & Loss) Explained
The income statement shows how much money your business earned (or lost) over a period—like a video of your financial performance over months or a year.
Income Statement Structure
Revenue (Sales)
- Cost of Goods Sold (COGS)
= Gross Profit
Gross Profit
- Operating Expenses
= Operating Profit (EBIT)
Operating Profit
- Interest Expense
- Taxes
= Net ProfitKey Components
Revenue/Sales: Total money earned from selling products or services
Cost of Goods Sold (COGS): Direct costs of products sold—purchase price of goods, raw materials, direct labor. Uses FIFO, LIFO, or weighted average for calculation.
Gross Profit: Revenue minus COGS. Shows profitability before operating costs.
Operating Expenses: Costs of running the business—rent, salaries, utilities, marketing, depreciation.
Net Profit: The bottom line—what’s left after all expenses, interest, and taxes.
Sample Income Statement
| ABC Trading Company – Income Statement for Year Ended December 31, 2024 | |
|---|---|
| Sales Revenue | PKR 12,000,000 |
| Less: Sales Returns | (PKR 200,000) |
| Net Sales | PKR 11,800,000 |
| Cost of Goods Sold | (PKR 7,500,000) |
| Gross Profit | PKR 4,300,000 |
| Operating Expenses: | |
| Salaries & Wages | PKR 1,800,000 |
| Rent | PKR 600,000 |
| Utilities | PKR 240,000 |
| Marketing | PKR 150,000 |
| Depreciation | PKR 120,000 |
| Other Expenses | PKR 290,000 |
| Total Operating Expenses | (PKR 3,200,000) |
| Operating Profit | PKR 1,100,000 |
| Interest Expense | (PKR 80,000) |
| Profit Before Tax | PKR 1,020,000 |
| Income Tax | (PKR 200,000) |
| Net Profit | PKR 820,000 |
The Cash Flow Statement Explained
The cash flow statement shows actual cash movement—addressing the critical question: “Where did the money go?” It reconciles your profit with your cash position.
For detailed cash flow management strategies, see our dedicated guide.
Three Sections of Cash Flow Statement
1. Operating Activities: Cash from day-to-day business operations
- Cash received from customers
- Cash paid to suppliers and employees
- Interest and taxes paid
2. Investing Activities: Cash spent on or received from long-term assets
- Purchase of equipment, vehicles, property
- Sale of assets
3. Financing Activities: Cash from loans and owner transactions
- Loans received or repaid
- Owner capital contributions
- Owner drawings/dividends
Sample Cash Flow Statement
| ABC Trading Company – Cash Flow Statement for Year Ended December 31, 2024 | |
|---|---|
| Operating Activities | |
| Net Profit | PKR 820,000 |
| Add: Depreciation | PKR 120,000 |
| Increase in Receivables | (PKR 200,000) |
| Increase in Inventory | (PKR 300,000) |
| Increase in Payables | PKR 150,000 |
| Net Cash from Operations | PKR 590,000 |
| Investing Activities | |
| Purchase of Equipment | (PKR 200,000) |
| Net Cash from Investing | (PKR 200,000) |
| Financing Activities | |
| Bank Loan Repayment | (PKR 100,000) |
| Owner Drawings | (PKR 240,000) |
| Net Cash from Financing | (PKR 340,000) |
| Net Change in Cash | PKR 50,000 |
| Opening Cash Balance | PKR 450,000 |
| Closing Cash Balance | PKR 500,000 |
How the Three Statements Connect
The three financial statements are interconnected:
- Net Profit from Income Statement flows into Retained Earnings on Balance Sheet
- Net Profit is the starting point for Cash Flow Statement
- Ending Cash from Cash Flow Statement equals Cash on Balance Sheet
- Changes in Balance Sheet items (receivables, payables, inventory) appear in Cash Flow Statement
Key Financial Ratios from These Statements
Profitability Ratios (from Income Statement)
Gross Profit Margin = (Gross Profit / Revenue) × 100
Example: (4,300,000 / 11,800,000) × 100 = 36.4%
Net Profit Margin = (Net Profit / Revenue) × 100
Example: (820,000 / 11,800,000) × 100 = 6.9%Liquidity Ratios (from Balance Sheet)
Current Ratio = Current Assets / Current Liabilities
Example: 2,500,000 / 1,000,000 = 2.5 (healthy if above 1.5)
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Example: (2,500,000 - 1,200,000) / 1,000,000 = 1.3Solvency Ratios (from Balance Sheet)
Debt-to-Equity = Total Liabilities / Owner's Equity
Example: 1,500,000 / 2,000,000 = 0.75 (lower is better)How to Generate Financial Statements
Manual Method (Not Recommended)
Compile data from ledgers and journals into statement format. Time-consuming and error-prone.
Spreadsheet Method
Use Excel templates with formulas. Better than manual but still requires significant data entry.
Accounting Software (Recommended)
Accounting software like HysabOne automatically generates all three statements from your transaction data. Reports are available in real-time and can be generated for any period.
Frequently Asked Questions
How often should I prepare financial statements?
Which financial statement is most important?
What is the difference between cash basis and accrual accounting?
Do I need an accountant to prepare financial statements?
What financial statements does FBR require?
Conclusion
Understanding financial statements is essential for every business owner. These three reports—Balance Sheet, Income Statement, and Cash Flow Statement—provide a complete picture of your business’s financial health. Regular review helps you make better decisions, plan for growth, and meet your obligations to tax authorities and lenders.
Need help generating financial statements for your business? HysabOne automatically creates all three statements from your daily transactions. Contact us on WhatsApp for a demo.
Last Updated: December 2024