Small Business Financial Statements Guide

The Four Statements
How the Statements Connect

A small business has four financial statements: the income statement (also called the profit and loss statement), the statement of owner's equity, the balance sheet and the statement of cash flows. They work as a set. Net income from the income statement goes into owner's equity, the ending equity goes onto the balance sheet, and the statement of cash flows explains how the cash on the balance sheet got there. This page is an overview of the set and how the pieces connect. Each statement has its own guide, linked below.

Billed publishes this page. The definitions are quoted from OpenStax, Principles of Accounting, Volume 1 (Rice University), opened on October 30, 2026. Ask your accountant how your business should prepare its statements.

The Four Statements

OpenStax's section 2.1 says "Financial statements are reports that communicate the financial performance and financial position of the organization." It lists four, in the order they're prepared, and notes that "The order of preparation is important as it relates to the concept of how financial statements are interrelated."

Income statement: "a statement that shows the organization's financial performance for a given period of time". Revenue minus expenses gives net income, or a net loss. See what is a profit and loss statement and what is net income.
Statement of owner's equity: "a statement that shows how the equity (or value) of the organization has changed over time". See what is equity in business.
Balance sheet: "a statement that lists what the organization owns (assets), what it owes (liabilities), and what it is worth (equity) on a specific date". See what is a balance sheet.
Statement of cash flows: "a statement that lists the cash inflows and cash outflows for the business for a period of time". See what is a cash flow statement.

Three of the four cover a period, such as a month or a year. The balance sheet shows one date, the end of that period.

OpenStax uses a sole proprietorship for these statements. For a corporation, it says "instead of owner's equity we begin using stockholder's equity, which includes account titles such as common stock and retained earnings to represent the owners' interests."

How the Statements Connect

Income statement to owner's equity. OpenStax section 2.3: "the Net Income (or Net Loss) is carried forward to the statement of owner's equity". Equity also changes with what the owner puts in and takes out.
Owner's equity to the balance sheet. The ending equity balance "is carried forward to the balance sheet", where assets equal liabilities plus equity.
Balance sheet cash to the statement of cash flows. OpenStax section 16.3: "The beginning cash balance is presented from the prior year balance sheet." and "Total net cash flow added to the beginning cash balance equals the ending cash balance." That ending cash balance is the cash shown on the balance sheet at the end of the period.

Profit and cash are different numbers. OpenStax section 16.1 notes that "cash flows often differ significantly from accrual basis net income." A sale on credit counts as revenue before the customer pays, and buying equipment or taking money out of the business uses cash without being an expense. See what is accrual accounting and what is cash flow.

Worked Example: One Month, Four Statements (sample figures)

The business, transactions and figures here are a sample, invented for this example. To keep the numbers small, it leaves out depreciation and taxes.

A sample photography business, run as a sole proprietorship, has this first month:

The owner puts in $5,000 of cash.
The business buys a camera for $2,000 in cash.
It bills clients $4,000 for work done. Clients pay $3,000 by month end, and $1,000 is still owed.
It has $1,500 of expenses: $1,200 paid in cash and a $300 software bill not yet paid.
The owner takes out $800 for personal use.

Income statement for the month

Revenue $4,000 − expenses $1,500 = net income $2,500

Statement of owner's equity

Beginning equity $0 + owner investment $5,000 + net income $2,500 − withdrawals $800 = ending equity $6,700

Balance sheet at month end

Cash: $4,000 (from the statement of cash flows below)
Accounts receivable: $1,000
Equipment: $2,000
Total assets: $4,000 + $1,000 + $2,000 = $7,000
Accounts payable: $300
Owner's equity: $6,700 (from the statement of owner's equity)
Liabilities plus equity: $300 + $6,700 = $7,000, the same as total assets

Statement of cash flows for the month

Operating: $3,000 collected − $1,200 paid = $1,800
Investing: −$2,000 for the camera
Financing: $5,000 owner investment − $800 withdrawal = $4,200
Net cash flow: $1,800 − $2,000 + $4,200 = $4,000
Beginning cash $0 + $4,000 = ending cash $4,000, the cash on the balance sheet

The owner's money in and out is listed under financing because it changes equity. OpenStax section 16.2 says financing cash flows "can be identified from changes in long-term liabilities and equity."

The month earned $2,500 of profit but brought in $1,800 of operating cash. The gap is the $1,000 clients still owe, less the $300 bill not yet paid: $2,500 − $1,000 + $300 = $1,800. The cash flow statement guide shows that adjustment step by step.

Reading Them Together

Each statement answers a different question, so read them side by side for the same period:

Did the business make a profit? The income statement.
Where did the profit go? The statement of owner's equity tells you how much stayed in the business and how much the owner took out.
What does the business own and owe? The balance sheet.
Where did the cash come from, and where did it go? The statement of cash flows.

Comparing each statement with the same period last month or last year shows the trend. For ratios built from these figures, see what is financial ratio analysis. For managing the cash side, see how to manage cash flow.

Where Billed Fits

Billed's financial reporting page says "Billed offers several built-in reports: Invoice Reports (paid, partially paid, and overdue), Expense Reports, Income vs Expense Reports, Top Selling Products, and Time Tracking Reports." It also says "All reports in Billed can be exported for use with your accountant, bookkeeper, or tax software."

The invoices and expenses you record in Billed are among the figures an income statement is built from.

When This Guide Isn't for You

This overview follows OpenStax's sole proprietorship statements. If your business is a corporation, has more than one entity, or reports to investors or a lender under specific standards, ask your accountant which statements you need and how they should be prepared.

Related Guides

Frequently Asked Questions

What are the four financial statements?

The income statement, the statement of owner's equity, the balance sheet and the statement of cash flows. OpenStax lists them in that order, which is the order they're prepared in.

How are the financial statements connected?

Net income from the income statement goes into the statement of owner's equity. The ending equity goes onto the balance sheet. The statement of cash flows starts from the beginning cash balance and ends at the cash shown on the balance sheet at the end of the period.

Why is net income different from cash?

Revenue counts when it's earned, even if the customer hasn't paid, and some cash payments, such as buying equipment or an owner's withdrawal, aren't expenses. In the sample on this page, the month's net income was $2,500 and its operating cash flow was $1,800.

Which financial statement is prepared first?

The income statement, because its net income is needed for the statement of owner's equity, which in turn gives the equity figure for the balance sheet.

Does a small business need all four statements?

OpenStax presents the four as a set that works together. Which ones you prepare, and how often, depends on what you, your lender and your tax return need, so ask your accountant.

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Small Business Financial Statements Explained