1st October 2025
Stephen Ryan
Disclaimer: This article is intended to be a plain English, introductory guide to reading New Zealand Financial Statements. Every word in a set of financial statements is there for a reason, but this article is about helping someone to build a baseline understanding of the most materially relevant parts of the Financial Statements for business owners. To keep things clear, some details have been simplified and certain technical aspects have been left out.
Running a business in New Zealand means you'll typically get 3 documents from your accountant each year:
A Tax Return,
Company Resolutions, and
Financial Statements (also called Annual Accounts, Annual Reports, or a Financial Report)
The Tax Return is pretty self-explanatory, it's the document filed with Inland Revenue and shows you how much tax you have to pay.
The Company Resolutions satisfies a bunch of the requirements under the Companies Act.
The Financial Statements combine several accounting reports into one document. These can feel overwhelming, especially if nobody has ever explained what each report means and why it matters.
This article is about demystifying the Financial Statements, and giving you the tools to understand what they're telling you about your business - empowering you to make informed decisions about your business.
Typically, New Zealand small-to-medium businesses (defined as revenue up to $33m) receive reports prepared under the accounting policies set by Chartered Accountants Australia and New Zealand (CA ANZ). To check if yours are, look in the “Notes to the Financial Statements” under the Basis of Preparation heading - it should state that they follow a CA ANZ framework.
A typical set of Financial Statements for a small-to-medium business with $33m in revenue or less will include:
Compilation Report
Directory
Approval/Signing Page
Statement of Profit or Loss (also called the Income Statement, P&L, or the Statement of Financial Performance)
Statement of Changes in Equity
Balance Sheet (aka the Statement of Financial Position)
Shareholder Current Accounts
Depreciation Schedule (also called the Fixed Asset Schedule, or the Capital Expenditure Schedule)
Notes
Usually 4–5 paragraphs of disclaimers and responsibilities. The key takeaway: accountants prepare Financial Statements based on the information you provide. While we’ll query anything that looks unusual, we can’t take responsibility if the information itself is incorrect.
Example: if you tell us your home office is 25 sqm, we’ll take your word for it. If it’s actually 10 sqm and IRD audits you, you’re responsible for any penalties and interest.
Lists basic facts about the business such as who the directors and shareholders are.
This is where the Directors take ownership of the Financial Statements, saying that they approve the report by signing it. It's important that you ask any questions and get any errors corrected before signing off.
This (alongside the Balance Sheet) is one of the most important reports. It shows how your business performed over the financial year.
It’s usually prepared on an accrual basis, meaning income and expenses are recorded when they occur - not when cash is received or paid. For example, if you complete a job on 31 March but get paid on 1 April, accrual accounting records the income in March, as opposed to cash basis which would record the income in April.
This report shows income earned and expenses incurred, but not asset purchases or debt repayments (those appear in the Balance Sheet).
When reading it, think about how the numbers reflect your business decisions. Example: if you raised prices with inflation, you’d expect both sales and purchases to increase by a similar percentage compared with last year. If not, investigate to protect your margins.
You can also ask your accountant to format this report to highlight what matters most to you — such as Gross Profit, EBITDA, or separating shareholder remuneration.
The Statement of Profit or Loss shows the accounting profit or loss, which is normally different to the taxable profit or loss figure that's in the company's Tax Return. The difference between the two are tax adjustments, for example, only 50% of the entertainment expenses are tax deductible, meaning that the full 100% of the expense is in the accounting profit, while 50% of the expense is in the taxable profit.
The income tax expense will normally have a number corresponding to a note showing how the taxable profit is calculated from the accounting profit + tax adjustments.
This is very much a report for the accountants - it reports changes in the company's equity from changes like movement in share capital, dividends, and the surplus/deficit for the year.
Along with the Statement of Profit or Loss, the balance sheet is one of the most important reports to read and understand.
It's a snapshot in time at the balance date, showing what the company owns (assets) versus what the company owes (liabilities). Equity is just the difference between the two.
You're wanting to see things like
Solvency: assets > liabilities (excluding shareholder current accounts).
Liquidity: current assets > current liabilities (current ratio).
Quick ratio: cash + receivables can cover current liabilities.
Debt levels: external debt vs total assets and equity.
Assets are listed from most to least liquid. “Current” means expected to be used, collected, or paid within 12 months.
Remember: this is just a summary of a snapshot in time. For more detail, check the relevant notes or relevant report.
Once you're confident you understand the Statement of Profit or Loss and the Balance sheet, the next report you want to understand is the Shareholder Current Accounts.
You (the shareholders) and your company are separate legal entities.
The Shareholder Current Accounts report records the transactions between the shareholders and the company and comes up with a figure at the end showing how much the company owes the shareholders, or how much the shareholders owe the company.
Every time you take drawings out of the company, or make a private payment out of the company's bank account (including for personal tax), it's recorded here as a debit. Similarly, if you pay for a business expense from your private bank account, or transfer some funds in, it's recorded here as a credit.
If the shareholders take out more money from the company than they are credited for, then the current account is overdrawn, meaning that the shareholders are in debt to the company.
Having an overdrawn current account is bad, because it is deemed to be an interest free loan, which attracts fringe benefit tax.
Most business don't want to be registered for Fringe Benefit Tax, so to get around this, Accountants record that the company charged the shareholders interest.
While this solves the Fringe Benefit Tax issue, the downside is that the interest is taxable income for the company, which in turn means more tax to pay.
If your current account is overdrawn, there are 3 main ways to get the current account back in credit:
Introduce funds
Shareholder Salaries without PAYE deducted
Non-cash Dividends
Introducing funds is as simple as transferring money from your bank account to the company's.
Shareholder Salaries without PAYE deducted is an accounting entry done when creating the accounts to allocate the company's taxable profit to the shareholders. This is very common to do, and has great tax planning benefits associated with it, but there are limits and anti-avoidance rules to be considered.
Non-Cash Dividends are essentially converting the previous years' earnings into taxable income for the shareholders in the current year via a paper transaction (journal). They're normally the last resort because there's a cost to creating them and they should only be suggested if the benefit is greater than the cost. Dividends are part of a wider tax planning conversation and there is quite a lot to consider when declaring one.
Tracks your fixed assets (e.g. vehicles, equipment, property improvements etc). Assets don’t get fully expensed when purchased because they help you generate income over multiple years. Instead, their value is reduced over the assets' useful life through depreciation.
Inland Revenue specifies the depreciation rates that we can use to depreciate an asset, so the book value very rarely matches the market value.
The notes are the explanatory detail of the accounts and are for business owners who want to deep dive into the numbers, or read about how the numbers are accounted for.
If a number in one of the other reports doesn't look right, have a look here to see if there's commentary on how the number was reached. For example, you might be expecting to see an investment valued at market value, but the accounting policy say its valued at cost.
Financial Statements can feel daunting at first, but once you understand the key reports, they become an invaluable tool for running your business. They help you identify risks, spot opportunities, and make confident decisions.
If you’d like help making sense of your own financial statements — and turning them into clear, actionable insights — get in touch with Step Ahead Accounting. We specialise in helping New Zealand business owners understand their numbers, stay compliant, and plan for growth.