Reading your financial statements: a founder's field guide
What the balance sheet and income statement each actually tell you, the questions they answer, and the three numbers worth checking every single month.
The balance sheet is a photograph at one date: assets are what the company owns, liabilities what it owes, and equity — share capital plus retained earnings — is what is left for owners. The income statement is a film across a period: income less expenses equals profit or loss, on the accrual basis. Read them together monthly: profit and its trend from the income statement, cash and receivables from the balance sheet, and whether equity is growing.
Your accountant sends two core statements. They are not two views of the same thing — they answer different questions, and reading each for the other's answer is how owners mislead themselves.
The balance sheet: a photograph
The balance sheet freezes one date and answers: what does the company own, owe, and keep?
| What it holds | Typical lines | |
|---|---|---|
| Assets — what it owns | Resources with future value | Cash, trade receivables, inventory, equipment |
| Liabilities — what it owes | Claims by outsiders | Trade payables, loans, taxes due |
| Equity — leftover for owners | Assets minus liabilities | Share capital, retained earnings |
The structure always balances because equity is defined as the difference. Two lines deserve an owner's regular attention: trade receivables (money billed but uncollected — the earliest warning of collection trouble) and retained earnings (accumulated kept profits — the legal pool for dividends, and the simplest single measure of whether the company has created value since day one).
The income statement: a film
The income statement covers a period and answers: did the business model work this month, this quarter, this year?
- Income — revenue from customers, plus other income;
- Expenses — operating costs, then taxes;
- Profit or loss — the difference, on the accrual basis: revenue when earned, expenses when incurred, regardless of when cash moved.
That accrual basis is why profit and the bank balance diverge — and why the answer to "can we pay next month's salaries?" lives on the balance sheet (cash) while "should we keep running this business?" lives here.
How the two connect
Each period's profit flows into the balance sheet: profit increases retained earnings, losses reduce them. A company that shows profits year after year but whose cash never grows is telling you something through that connection — the profit is real but stuck in receivables or inventory, or leaving as drawings that need proper treatment.
A monthly reading discipline
Five minutes with the management accounts, same questions every month:
- Revenue and profit — versus last month, versus plan. Trend beats level.
- Cash — against known obligations for the next 60 days: payroll, CPF, rent, tax instalments.
- Receivables — rising while revenue is flat means collections are slipping; act while the invoices are young.
- Anything surprising — ask your accountant that week, not at year end. Questions are free; discoveries in December are not.
The statutory versions of these statements — prepared under the accounting standards, possibly audited, possibly filed — are the formal, annual expression of the same two documents. Learn to read the monthly ones and the annual set holds no surprises, for you or for anyone you show them to.
Frequently asked questions
This guide is general information, not legal or tax advice. Confirm requirements with ACRA and IRAS, or speak to your corporate secretary.