In this blog, you will learn about the financial statements. Also, you come to know the nature of financial statements and objectives of financial statements. For this, you have to follow the whole article to get more knowledge.
Meaning of Financial Statements
Financial Statements refer to such statements which report the profitability and the financial position of the business at the end of accounting period.
(i) Income Statement (or Trading and Profit and Loss Account) which shows results of business operations during an accounting period.
(ii) Statement of Financial Position (or Balance Sheet) which shows financial position of an enterprise at a specified point of time.
In the words of John N. Myer, “The financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the income statement showing the results of operations during a certain period.” These two financial statements are termed as ‘Final Accounts’.
In modern times, in addition to the aforesaid two basic financial statements, two other statements namely a Statement of Retained Earnings and a Cash Flow Statement are also generally included in financial statements. In the next sections, you will learn about nature of financial statements.
Nature of Financial Statements
Facts about events that are recorded chronologically are used to produce financial statements. As a result, we must first translate all of this data into money. Then, we must process them in accordance with all applicable laws and protocols. Finally, we may create financial statements using all of this information. According to this comprehension, the following factors determine the nature of financial statements:
1. Recorded Facts
In order to make the statements, we must first record the facts in monetary form. In order to do this, we must take into account numbers such as fixed assets, cash, trade receivables, etc. These recorded facts shows the nature of financial statements.
2. Accounting Conventions
Specific norms that apply to the accounting process are prescribed by accounting standards. While creating these assertions, we must adhere to these conventions. For instance, inventory may be valued at market price or cost price, whichever is less.
In addition to conventions, postulates also play a significant role in the creation of these claims. In accounting, postulates are essentially assumptions that we must make. It is the nature of financial statements. For instance, the going concern assumption assumes a company will continue to operate for a very long time. As a result, we must treat assets according to their historical cost.
4. Personal Ideas and Judgments
Even these factors are heavily considered when creating these assertions. Thus, when figuring up things like depreciation, we must rely on our own estimates.
In the following section, we will come to know the objectives of financial statements.
Objectives of Financial Statements
Financial statements are typically used by the owner and other stakeholders of a company to understand how the firm operates. They could easily portray the organization’s actual condition of affairs through financial statements. Listed below are a few objectives of financial statements:
- The specific state of an organization’s assets and liabilities is shown in the financial statements. Most external users, such as tax and financial experts, lack access to this information.
- They aid in estimating the extent of a company’s capacity for profit. This information can be used by shareholders and investors to make financial decisions.
- The effectiveness of an organization’s management is shown in its financial statements. The productivity and profitability of an organization determine how well it performs, as these assertions demonstrate. It is the objectives of financial statements.
- They even assist users in understanding the accounting principles and procedures applied in these statements. This really aids in comprehending the financial figures.
- These statements also include data on the organization’s financial flow. These details can be used by financial experts to forecast an organization’s liquidity and cash requirements and to fulfill the objectives of financial statements.
- Financial disclosures finally make the social impact of organizations clear. This is due to the fact that it illustrates how outside forces affect how an organization functions.