IFRS Financial Statements: How the Balance Sheet, Income Statement and Cash Flow Fit Together

IFRS financial statements are a set of five linked reports: the statement of financial position (balance sheet), the statement of profit or loss (income statement), the statement of cash flows, the statement of changes in equity, and the notes. Each one answers a different question about the same set of journal entries, and all of them must agree with each other to the last cent.

This guide explains what each statement shows, how IAS 1 and Iranian practice order the lines, and then builds all four statements from three simple transactions so you can see exactly how the numbers tie together. At the end we cover comparatives, how Ledgeriano generates the reports from account categories, and the mistakes that most often make statements fail to reconcile.

#What are the IFRS financial statements?

Under IAS 1, a complete set of financial statements has four primary statements plus notes, and each statement answers one specific question. Reading them together tells you whether a business is profitable, solvent and generating cash.

A few relationships hold these statements together:

• Profit from the income statement flows into retained earnings in the statement of changes in equity.
• Closing equity from the statement of changes in equity equals total equity on the balance sheet.
• Closing cash on the statement of cash flows equals the cash and cash equivalents line on the balance sheet.

If any of those three links breaks, something is wrong in the underlying ledger, not in the report layout.

A note on timing: IFRS 18, Presentation and Disclosure in Financial Statements, replaces IAS 1 for annual periods beginning on or after 1 January 2027. It keeps the balance sheet largely as it is but adds defined subtotals such as operating profit to the income statement. The logic in this guide still applies.

#The balance sheet: what the business owns and owes

The balance sheet (IAS 1 calls it the statement of financial position) lists assets, liabilities and equity on one date, and assets must always equal liabilities plus equity. It is a snapshot, so a balance sheet dated 31 December says nothing about what happened on 30 December.

IAS 1 requires a split between current and non-current items unless a liquidity presentation is more relevant (banks, for example). An asset is current when you expect to realise it within twelve months or within the normal operating cycle. The same test applies to liabilities.

#Typical IAS 1 order

IAS 1 does not fix a mandatory order, but most IFRS reporters in Europe and the Middle East use this layout:

1. Non-current assets (property, plant and equipment, intangibles, long-term investments)
2. Current assets (inventory, trade receivables, prepayments, cash)
3. Equity (share capital, reserves, retained earnings)
4. Non-current liabilities (long-term borrowings, lease liabilities, provisions)
5. Current liabilities (trade payables, tax payable, short-term debt)

#The Iranian order

Classic Iranian practice listed current assets first, in order of liquidity, and put liabilities before equity. You can still see that tradition in the Iranian group coding, where group 1 is current assets and group 3 is current liabilities. The revised Iranian Accounting Standard No. 1 and the model statements published by the Audit Organization moved closer to the IFRS style: non-current assets first, then current assets, then equity, non-current liabilities and current liabilities. Whichever order you print, the totals are identical, because the order is presentation only.

#The income statement: did the business make money?

The income statement (statement of profit or loss) reports revenue and expenses for a period and ends with profit or loss for the year. IAS 1 allows expenses to be classified by function (cost of sales, selling, administrative) or by nature (salaries, depreciation, raw materials). Most trading and service companies use the function method because it shows gross profit.

A function-based income statement usually runs like this:

1. Revenue (net of returns and discounts)
2. Cost of sales
3. Gross profit
4. Selling, administrative and other operating expenses
5. Operating profit
6. Other income, finance income, finance costs and other expenses
7. Profit before tax
8. Income tax expense
9. Profit for the year

Iranian statements follow almost the same sequence, with revenue from operations (درآمدهای عملیاتی), cost of operating revenue, gross profit, selling and administrative expenses, and then other operating and non-operating items. Iranian companies also present a separate statement of comprehensive income when they have items such as revaluation surplus.

#Gross margin and net margin

Two ratios fall straight out of the income statement: gross margin (gross profit divided by revenue) and net margin (profit for the year divided by revenue). They are the quickest health check for a trading business, and Ledgeriano prints both beneath the totals.

#The statement of cash flows: where cash came from and went

The statement of cash flows, governed by IAS 7, explains the change in cash and cash equivalents between two dates by sorting every cash movement into operating, investing or financing activities. Profit and cash are different things, and this statement shows why.

#Direct vs indirect method

The direct method lists gross receipts and payments. The indirect method starts from profit and adjusts it for non-cash items (depreciation, amortisation) and for changes in working capital (receivables, inventory, payables). IAS 7 encourages the direct method, but the indirect method is far more common in practice because it can be produced directly from the general ledger. Ledgeriano produces the indirect method.

The working capital rule is easy to remember: an increase in a non-cash current asset uses cash, so it is subtracted; an increase in a current liability provides cash, so it is added.

#The statement of changes in equity

The statement of changes in equity reconciles each equity component (share capital, reserves, retained earnings) from its opening to its closing balance. It shows the three things that change the owners' stake: profit or loss, contributions from owners and distributions to owners.

A typical layout has one column per equity component and rows for opening balance, profit for the year, other comprehensive income, shares issued, dividends and closing balance. Iranian statements use the same structure, with legal reserve (اندوخته قانونی) usually appearing as a separate column because companies must transfer 5 percent of net profit to it until it reaches 10 percent of capital.

#A worked example: four statements from three entries

The fastest way to understand how financial statements connect is to build them from a tiny ledger. Suppose a new company, Northwind Trading, starts on 1 January 2026 with the IFRS chart of accounts. Opening cash is zero. During the year it records three transactions:

1. The owners pay in 10,000 of share capital to the bank.
2. The company sells goods for 5,000: 3,000 is collected in cash and 2,000 stays on credit with a customer.
3. It pays 1,200 of rent from the bank.

To keep the example focused, the goods have no cost of sales and there is no tax.

#The journal entries

Every entry balances, so the trial balance balances too: debits of 16,200 equal credits of 16,200.

#Income statement for the year ended 31 December 2026

Gross margin is 100 percent in this simplified case and net margin is 76 percent (3,800 divided by 5,000).

#Balance sheet at 31 December 2026

#Statement of cash flows (indirect method)

Notice how the receivable explains the gap between profit (3,800) and operating cash (1,800). The business earned 5,000 but only collected 3,000, and it paid 1,200 in rent: 3,000 - 1,200 = 1,800.

#Statement of changes in equity

All three links hold: profit of 3,800 appears in equity, closing equity of 13,800 matches the balance sheet, and closing cash of 11,800 matches the bank line.

#Comparatives: showing the prior year

IAS 1 requires comparative information for the previous period for every amount in the current statements. Readers judge a business by trends, so a 3,800 profit means little until you know last year's figure.

Suppose that in 2027 Northwind sells 8,000, pays 1,200 of rent and 2,000 of salaries. The income statement then carries two columns:

Two practical rules keep comparatives clean. First, use the same account codes in both years, otherwise lines will not match. Second, if you reclassify an account (moving a cost from administrative to selling, for example), restate the comparative column too and say so in the notes.

#How Ledgeriano builds financial statements

Ledgeriano generates all four statements directly from posted journal lines, using the category attached to each account. You never map accounts to report lines by hand: the category is the mapping.

#Categories drive every line

Each account in the chart of accounts has a type (asset, liability, equity, revenue or expense) and a category. The balance sheet places cash, receivables, inventory, prepayments and similar categories under current assets, and PPE, intangibles, right-of-use assets and investments under non-current assets. Liabilities follow the same current or non-current logic. On the income statement, categories such as operating revenue, sales returns, cost of sales, selling expense, administrative expense, depreciation, finance income, finance cost and income tax place each account in the right section, and the report computes gross profit, operating profit, profit before tax, net profit and both margins.

#What each report does

• Balance sheet: grouped by section and category with account detail and an "is balanced" check. Before the year is closed, the current period's profit appears as its own line inside equity, so the statement balances at any date.
• Income statement: by function, for any date range inside a fiscal year, and it can be filtered by cost center or project.
• Cash flow statement: indirect method, with depreciation added back, working capital changes, investing and financing sections, opening and closing cash and a reconciliation check.
• Statement of changes in equity: opening balance, profit allocated by the closing entry, contributions, distributions and closing balance per equity account.

All amounts are reported in the business's base currency, even when entries were recorded in other currencies (see the multi-currency accounting guide). Turn on prior-year comparison and Ledgeriano adds a comparative column from the previous fiscal year, matched by account code and category. Every report can be printed or exported to CSV.

You can see the full list of reports on the features page, and teams that consume statements in their own dashboards can pull the same data through the accounting API.

#Common mistakes in financial statements

Most statements that fail to reconcile have one of a handful of causes. Check these before you blame the software.

1. Unposted drafts. Reports use posted entries only. A draft sale that nobody posted is invisible to the income statement.
2. Wrong category. A loan booked under a current-liability category appears in working capital instead of financing, which distorts operating cash flow.
3. Cash accounts outside the cash category. If a new bank account is not categorised as cash, the cash flow statement treats its movements as operating or investing flows and closing cash no longer matches the balance sheet.
4. Netting receivables and payables. IAS 1 prohibits offsetting unless a standard requires or permits it. A customer who is also a supplier still shows a receivable and a payable.
5. Missing year-end adjustments. Depreciation, accruals and foreign currency revaluation must be booked before you print. The year-end closing guide has a checklist.
6. Inconsistent comparatives. Renumbering accounts between years breaks the comparison column. Copy the chart forward rather than rebuilding it.
7. Treating owner withdrawals as expenses. Drawings reduce equity; they never belong on the income statement.

#Choosing financial statements software

Good financial statements software should produce all four statements from the same ledger without exports to a spreadsheet, show comparatives, respect the standard you report under and keep an audit trail behind every figure. Spreadsheets can do the arithmetic, but they cannot stop someone from typing over a total. Our comparison of spreadsheets, desktop software and Ledgeriano goes through the trade-offs.

If you run several companies, check that each one keeps its own base currency, fiscal years and chart, because consolidating later is much easier when each entity's statements are clean. Ledgeriano supports IFRS, US GAAP, European PCG-style and Iranian national standards templates, described on the standards page, and charges per action with credits rather than per seat, as set out on the pricing page. For the full text of IAS 1, see the IFRS Foundation's IAS 1 page.