Concept Of Financial Statements
Past events and performances serve as background for making projections if they are to be realistic.The financial statements provide important information concerning past financial transactions and their effects om the profitability and the financial position of the business.
Various users of financial statements such as owners , investors , creditors , management etc. must make an analysis of financial statements to make right decision. Therefore financial statements are the means of conveying to owners , management or to interested outsiders a concise picture of profitability and financial position of the business. Financial statements are the end products of the accounting process which give a concise accounting information of the period after the accounting period is over.Financial statements are the summary reports of a company's financial transactions. They report the end results of accounting activities during a given period of time. Financial statements provide the income or loss and financial position of a company. Financial statements are end of the period accounts prepared to show the profit or loss situation for a period of time and to assess the financial position and cash flow situation on a particular date. Financial statements report the result of past activities. Therefore, the are also called as the historical record of a company.
Financial Statements Include:
1. Income Statement
The income statement, sometimes called as the trading and profit and loss account or an earning statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as month or year by comparing the revenues generated with the expenses incurred to produce these revenues.
2. Statement Of Retained Earnings
The statement of retained earnings is also called as profit and loss appropriation account. One purpose of this statement is to connect the income statement and the balance sheet. The statement of retained earnings explains the changes in retained earnings between two balance sheet date. These changes usually consist of the addition of net income and the deduction of dividends.
3. Balance Sheet
The balance sheet, sometimes called statements of financial position, lists the company's assets, liabilities and stockholder's equity as on a particular date. A balance sheet is like a snap shot that captures the financial position of a company at a particular point of time.
4. Statement Of Cash Flows
Management is interested in the cash inflows to the company and the cash outflows from the company, because they determine the company's liquidity, its ability to pay its bills when due. The statement of cash flows shows the cash inflows and outflows from operating, investing and financing activities.
Features Of Financial Statements
The following are the features of financial statements:
1. Financial statements are always expressed in monetary terms. They ignore qualitative aspects. In other words, the non-monetary events do not come under the scope of financial statements.
2. Financial statements are always prepared for a certain period of time. They generally cover the period of one year.
3. Financial statements are historical in nature since they always present the past performance. Hence, they do not carry the futuristic approach.
Objectives Of Financial Statements
Financial statements of a company are the result of management's past actions and decisions. They are the end products of the accounting process. They give a picture of solvency and profitability of a company. The major objectives of the financial statements are as follows:
1. To provide the financial information to the internal and external users.
2. To provide the information, which are useful in the decision making process.
3. To reveal the profitability and solvency of the company.
4. To help to evaluate the financial position and efficiency of the management.
5. To show the financial health of the company.
Classification Of Accounting
Accounting may be classified into the following types.
1. Financial Accounting:
Financial accounting is maintained to record business transactions in the books of accounts so that operating results and financial condition for a particular period on a particular date can be known.
2. Cost Accounting:
The process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data is called cost accounting.
3. Management Accounting:
IManagement accounting is related to the use of accounting data collected with the help of financial and cost accounting for the purpose of policy formulation , planning , control and decision making by the management.