Financial Statements
Senior 6 · Entrepreneurship
Financial Statements
Lesson 1 of 4
25 min
Uwase runs an agro-input shop in Nyagatare town, selling seed, fertiliser, hoes and sprayers to the farmers of the district. After a good year she wants to borrow Frw 5,000,000 from her SACCO to open a second shop in Karangazi. The loan officer listens politely, then says: "Bring me your financial statements for the year ended 30 June 2026: an income statement, a balance sheet and a cash flow statement." (An illustrative case: the names and figures in this unit are invented.)
Uwase's bookkeeper already has a trial balance that agrees. But a list of twenty-four balances does not tell the officer what he needs to know.
Think about it: before lending Frw 5,000,000, what three things would you want to know about Uwase's business?
Definition
Financial statements (or final accounts): formal reports, prepared from the ledger balances at the end of an accounting period, that show a business's performance, its financial position and its cash movements.
Example: Uwase's income statement, balance sheet and cash flow statement for the year ended 30 June 2026.
Definition
Accounting period: the length of time covered by a set of financial statements, usually one year, often with shorter monthly or quarterly reports for the owner.
Example: Uwase's accounting year runs from 1 July 2025 to 30 June 2026.
| Statement | Question it answers | Covers | Built on |
|---|---|---|---|
| Income statement | Did the business make a profit or a loss, and how? | A period ("for the year ended") | Net profit = income − expenses |
| Balance sheet | What does the business own and owe, and what is the owner's share? | One date ("as at") | Assets = capital + liabilities |
| Cash flow statement | Where did cash come from and where did it go? | A period, often month by month | Closing cash = opening cash + inflows − outflows |
Definition
Income statement (also called the trading, profit and loss account): the statement that compares a period's income with the expenses of earning it, to find the gross profit and the net profit or loss.
Example: Uwase's income statement shows sales of seed and fertiliser for the year, the cost of the goods sold, her wages and rent, and the net profit left over.
Definition
Balance sheet (also called the statement of financial position): a list, at one date, of the business's assets, liabilities and capital, arranged to show that assets equal capital plus liabilities.
Example: on 30 June 2026 Uwase's balance sheet lists her delivery van, stock, debtors and cash, her bank loan and creditors, and her capital.
Definition
Cash flow statement: a statement of the cash that came into and went out of the business during a period, grouped by source and use, from the opening to the closing cash balance.
Example: it shows that Uwase received cash from sales and commission, and paid it out for stock, wages, rent and a loan repayment.
| User | What they want to know | Reads first |
|---|---|---|
| Owner (Uwase) | Is the business profitable? How much can I safely take out? | Income statement |
| SACCO or bank | Can the business repay a loan with interest, on time? | Cash flow statement and balance sheet |
| Rwanda Revenue Authority (RRA) | What is the taxable profit? | Income statement |
| Suppliers | Will the business pay for goods sold to it on credit? | Balance sheet (current assets and liabilities) |
| Employees | Is the business stable enough to keep paying wages? | Income statement |
| A possible partner or investor | Is the business worth putting money into? | All three |
From S2 you know the accounting equation. The balance sheet is that equation written out in full:
Capital is the owner's claim on the business. It grows when the business makes a profit and shrinks when the owner takes money or goods out:
This is how the income statement feeds the balance sheet: the net profit is added to the owner's capital. The cash flow statement's closing balance is the cash in the balance sheet. The three statements must agree with each other, which makes them a strong check on the accounts.
Tip
Read the heading. A statement that covers a PERIOD (income statement, cash flow statement) is headed "for the year ended 30 June 2026". A statement at ONE MOMENT (balance sheet) is headed "as at 30 June 2026". Examiners take marks off for the wrong heading.
Worked example 1: which statement?
Say where each item from Uwase's trial balance and year-end notes appears.
| Item | Statement | Reason |
|---|---|---|
| Sales | Income statement | Income of the year |
| Wages | Income statement | Expense of the year |
| Returns inwards | Income statement | Reduces sales |
| Delivery van | Balance sheet | Non-current asset: lasts for years |
| Debtors | Balance sheet | Current asset: owed to the business |
| Bank loan | Balance sheet | Liability |
| Drawings | Balance sheet | Deducted from capital, not an expense |
| Closing stock | Both | Reduces the cost of sales, and is a current asset |
Worked example 2: from profit to capital
On 1 July 2025 Uwase's capital was Frw 3,705,000. For the year her net profit was Frw 5,800,000, and she took out Frw 1,800,000 in cash and goods costing Frw 120,000. Find her closing capital, and check it against the balance sheet totals: assets Frw 13,255,000 and liabilities Frw 5,670,000.
Step 1: total drawings.
Step 2: closing capital.
Step 3: check with the accounting equation.
Both routes give Frw 7,585,000, so the income statement and the balance sheet agree. Lessons 2 and 3 prepare both statements in full.
Warning
Profit is not cash. A credit sale adds to this year's profit before a single franc arrives. Buying a delivery van uses a lot of cash but is not an expense in the income statement, because the van is an asset. Repaying a loan and taking drawings reduce cash but not profit. That is why a lender asks for all three statements, not just the profit.
Accounting Stuff, "Financial Statements: all the basics in 8 mins!" Watch for what each statement shows and how they connect. The video uses American terms: "revenue" is sales, "accounts receivable" is debtors and "accounts payable" is creditors.
Practice
Sources and credits
Written by Ganzaa: the Nyagatare agro-input case, the diagram, the tables, the worked examples and the practice items. The business, names and figures are illustrative (2026).
