The three statements
A period of trading, a photograph of one day, and a record of cash. They are three views of the same business and they lock together — which is why reading one without the others is how people get fooled.
Chapter 3 · Beginner
Three statements, and the reason there are three is that each answers a question the others cannot.
What each one is
The income statement — profit and loss — covers a period. It says: over this year, we sold this much, spent this much, and what was left was profit. A film of twelve months.
The balance sheet covers a moment. It says: on this date, we owned these things, owed these amounts, and the difference belongs to shareholders. A photograph of one day.
The cash flow statement covers the same period as the income statement but counts only cash. It says: this much money actually came in and went out, and here is why that differs from profit.
The tense is the first thing to get right. "Revenue of ₹4,200 crore" is a year. "Debt of ₹1,800 crore" is a single date, usually the last day of the year — which is the date a company would most like it to look good.
Why profit is not cash
The single most important idea in financial statements, and the reason the third statement exists.
Profit is measured on accrual: revenue is recognised when it is earned, not when the customer pays, and costs are recognised when incurred, not when the bill is settled.
That is the right way to measure a period's trading. If you deliver goods in March and are paid in May, the sale belongs to March. Otherwise profit would be an accident of payment timing.
But it means a company can report excellent profit while collecting nothing. Deliver ₹100 crore of goods on credit, record ₹100 crore of revenue and a healthy profit, and receive no money at all. The profit is real by the rules; the cash is absent.
That gap is where most accounting failures live. It is why chapter 6 calls the cash flow statement the one hardest to fake, and why chapter 14 is about the quality of earnings.
How they lock together
They are not independent documents. Three links, and knowing them makes the accounts legible.
Profit flows into the balance sheet. The year's profit, less dividends, is added to retained earnings inside shareholders' equity. So:
closing equity ≈ opening equity + profit − dividends
Cash flows into the balance sheet. The cash flow statement's bottom line is the change in the cash figure on the balance sheet.
The cash flow statement starts from profit. It takes the income statement's profit and adjusts it back to cash — adding non-cash charges like depreciation, and adjusting for the working capital movements of chapter 11.
So the income statement explains how equity changed, the cash flow statement explains how cash changed, and the balance sheet holds both. A business cannot be understood from one of them.
The accounting identity
The balance sheet rests on an identity that is true by construction:
assets = liabilities + equity
Everything the company has was funded by someone: lenders, or owners. Equity is the residual — assets minus liabilities — which is the same residual claim chapter 1 of the equity subject described from the shareholder's side.
It balances always, including when the business is failing. A balance sheet balancing proves arithmetic, not health.
Reading them together
Three questions, each needing two statements:
Is the profit turning into cash? Income statement against cash flow statement. Chapter 6.
Is the profit being earned on a reasonable amount of capital? Income statement against balance sheet. ₹100 crore of profit on ₹400 crore of capital is a different business from ₹100 crore on ₹4,000 crore. Chapter 9.
Is growth being funded by the business or by borrowing? Cash flow statement against balance sheet. Chapter 13.
Every useful ratio in this subject is a number from one statement over a number from another. That is not a coincidence — it is why there are three.
A fourth, briefly
Indian accounts also carry a statement of changes in equity, reconciling opening and closing equity line by line: profit, dividends, shares issued, and items of other comprehensive income that bypass the income statement.
It is short, and it is where the "roughly" in the equity link above gets resolved.
The point
The income statement covers a period, the balance sheet a single date, and the cash flow statement the same period in cash only. Profit is accrual and cash is not, which is why a company can be profitable and collecting nothing. The three lock together, so every useful ratio takes a number from one and divides it by a number from another.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Take one company's accounts and check the link: closing equity minus opening equity should be roughly the year's profit less dividends. Find the difference and work out what else moved through equity.
Other comprehensive income and share issuance also pass through equity. The reconciliation is in the statement of changes in equity.