Skip to main content

Financial Statements – Meaning and Types Financial Statements




Meaning of financial statements

Financial statements refer to reports prepared to evaluate the performance, financial health and the liquidity position of the business. Financial statements are prepared using the transactions accounted in the books of the account. In simple words, all the accounting data is consolidated into a financial statement in a manner which is generally accepted and understood.

Periodicity of financial statements

Traditionally, financial statements were prepared annually i.e. after the closure of the accounting period. With modern-day business operations and requirements, the business owners depend on the financial statements for decisions making. As a result, businesses prepare financial statement monthly, quarterly and half-yearly as well. The insights from the financial statements are reliable and help business owners to make confident decisions.

Users of  financial statements

Financial statements are used by internal users as well as external users. The financial statements depict the overall financial health of the business and help users to make better business decisions.

financial statement users

  • Internal users:Internal users of financial statements are management, employees, Owners etc.
  • External users:Regulatory, tax authorities, banks, unions, investors, creditors etc. are the external users of financial statement.

Types of financial statements

Using the accounting records, 3 types of financial statements are prepared by the company. These 3 types of financial statements provide insights about the financial health, profitability and liquidity of the business. Following are the 3 types of financial statement:

  • Balance sheet
  • Profit and loss account
  • Cash flow statements (CFS)

types of financial statements

  • Balance sheet: Balance sheet is a type of financial statement that summarizes the company’s assets, liabilities and the amount owned by the business owners. This financial statement broadly consists of assets and liabilities. A balance sheet helps the stakeholders to evaluate the efficiency in working capital, asset portfolio and the financial strength.

  • Profit and loss account: This statement reveals the performance of the business in terms of profit or loss for a specified period. Using this financial statement, net profit is calculated after considering the gross profit/loss and all other indirect expenses or incomes.

  • Cash flow statements: Cash flow statement projects the organization ability to generate cash inflow, cash outflows to meet its obligations or commitments and investment.

How to prepare financial statements

All the financial statements are prepared using the accounting transactions recorded in the books of the accounts. Preparing financial statements is one of the outcomes of accounting i.e. analyzing and interpreting the business transactions.

The following are the steps to prepare a financial statement:

  • Recording transactions in a journal book
  • Preparing ledger accounts
  • Preparing trial balance summarizing the closing balance of ledger accounts
  • Using trial balance, you need to prepare profit and loss account and balance sheet.

Cashflow statement is an independent financial statement which compliments balance sheet and income statement. Cash flow statement is prepared considering the operating activities, investing activities and financing activities.


Comments

Post a Comment

Popular posts from this blog

Break Even Point: Definition, Formula, Example and Analysis

What is the Break-Even Point? A simple financial tool which helps you determine at what stage your company, or a new service or a product, will be profitable. To put simply, break-even point analysis will tell you the number of products or services a company should sell to cover its costs, particularly fixed costs. Break-even is a situation where you are neither making money nor losing money, but all your costs have been covered. Break-even analysis is useful in studying the relation between the variable cost, fixed cost and revenue. Generally, a company with low fixed costs will have a low break-even point of sale. For example, a company has a fixed cost of Rs.0 (zero) will automatically have broken even upon the first sale of its product. The purpose of the break-even analysis formula is to calculate the amount of sales that equates revenues to expenses and the amount of excess revenues, also known as profits, after the fixed and variable costs are met. The main thing to understand i...
Post a Comment
Read more

What are the Key Reports a Business Owner Must Track and Which is the Best Tool for it?

As a business owner, you must be already keeping a track of the overall financial health of the business. While you may hire an accountant for end-to-end tasks that will keep your books of accounts updated, it is imperative that as a business owner, you also go beyond the basic understanding of key financial reports to take your business to the next level. The three primary key aspects which would help you as a business owner to get a holistic view of your company’s books of accounts in sync with your business transactions are; Cash Stock and Taxation Cash What is the ultimate goal of any business? To have regular cash flow, right? So, where do we get these crucial insights about cash flow management in order to stay updated with your company’s finances from? Let’s take a look at how these cash flow reports will help you build your business and trigger long term, growth. Cash Flow Cash flow is the amount of money going in and out of your business. Healthy cash flow can help lead your b...
Post a Comment
Read more

Accounting System: Definition, Types and Example

What is an Accounting System? Learning and keeping a track of your revenue is of key importance to any business. While there might be different accounting systems, depending on a company’s structure it goes without saying that maintaining updated books of accounts is the most important activity in a business. The commonalities between all companies accounting systems are; to manage the financial activities of a business, such as its revenue, expenses and liabilities. In this digital age, most accountants use sophisticated systems featuring overdue payment reminders, advanced reporting capabilities, automated data backups, and more. Before accounting systems became automated, manual bookkeeping was being practised, which wasn’t just a cumbersome task but also prone to inaccuracies and time consuming. Computerised accounting has managed to take extra load off of entrepreneurs and accountants, making accounting simple and reliable. Accounting systems help calculate the wages paid and paya...
Post a Comment
Read more