There are three basic financial statements:

• Income Statement. The income statement (also often called the “profit and loss statement” or “P&L”) tells you whether your business is generating a profit during a month, quarter or year. It shows your revenue or sales, and subtracts your costs or expenses to determine if you are making a profit (i.e., when your revenue exceed you expenses). Keep in mind that making a profit is different than generating cash, which is reflected in the Statement of Cash Flows described below.
• Statement of Cash Flows. The statement of cash flows (or cash flow statement) shows cash. It details cash inflows (from sales, revenue financing sources) and cash outflows (from expenses and debt repayments) during a month, quarter or year. This works hand in hand with the income statement. While the income statement shows you if you are making a profit, the cash flow statement shows you where the cash is going.
• Balance Sheet. The balance sheet presents the assets, liabilities, and equity of the business as of a date. Unlike an income statement and cash flow statement, which show results over a period, the balance sheet measures a period of time – usually the end of a month, quarter or year.

All businesses, no matter their size, should keep accurate accounting records and prepare these financial statements on a monthly basis. Most standard accounting packages can create these statements as long as the daily transactions of the business are entered (such as sales, expenses, loans, etc.). These financial statements are the standard language used by all to think about the financial status of the business so at the very least you should know what they mean and what they are used for.