A financial statement is an authorized document of the company, which explores the whole financial information of the company. The aim of the financial statement is to deliver information and understand the financial aspects of the company. Hence, preparation of the financial statement is very important as much as the financial decisions.
Meaning and Definition
Hamptors John; The financial statement is an organized collection of data according to logical and consistent accounting procedures. Its purpose is to convey an understanding of financial aspects of a company. It may show a position at a moment of time as in the case of a balance-sheet or may expose a service of activities over a given period, as in the case of an income statement.
Financial statements are the summary of the accounting process, which, delivers useful information to both internal and external parties.
According to John N. Nyer “Financial statements provide a summary of the accounting of a business enterprise, the balance-sheet reflecting the assets, liabilities and capital as on a certain data and the income statement showing the results of operations during a certain period”.
Generally financial statements consist of two important statements:
- The income statement or profit and loss account.
- Balance sheet or the position statement.
Apart from that, the business concern also makes some of the other parts of statements, which are valuable to the internal purpose such as:
- Statement of changes in owner’s equity.
- Statement of changes in financial position.
Income statement is also known as profit and loss account, which mirrors the operational position of the company during a period. Usually it consists of one accounting year. It determines the whole operational performance of the concern like total revenue produced and expenses suffered for earning that revenue.
Income statement supports to ascertain the gross profit and net profit of the concern. Gross profit is determined by preparation of trading or manufacturing account and net profit is determined by preparation of profit and loss account.
Position statement is also known as balance sheet, which mirrors the financial position of the company at the end of the financial year.
Position statement helps to ascertain and understand the total assets, liabilities and capital of the company. One can understand the strength and weakness of the concern with the assistance of the position statement.
Statement of Changes in Owner’s Equity
It is also known as statement of retained earnings. This statement delivers information about the changes or position of owner’s equity in the firm. How the retained earnings are employed in the business concern. These days, preparation of this statement is not popular and nobody is going to prepare the separate statement of changes in owner’s equity.
Statement of Changes in Financial Position
Income statement and position statement displays only about the position of the finance; hence it can’t measure the actual position of the financial statement. Statement of changes in financial position helps to understand the changes in financial position from one period to another period.
Statement of changes in financial position includes two important areas such as fund flow statement which contains the changes in working capital position and cash flow statement which contains the changes in cash position.
March 09, 2018