In the financial statements, systematic and concise compiled information is available about the financial affairs of an institution, hence the financial statement is the means of transferring ownership, creditors, and the public to the financial position of a business entity.
Financial Statement refers to an article in which the necessary financial information related to the business has been described.
The Financial details of the business are prepared at the end of an accounting period.
So, In addition to the above two financial statements, the cash flow statement is also prepared which gives information that does not receive income details and status details.
Nature of Financial Statement
Financial Statement is an article that presents the nature of the business that gives information about the financial condition of the organization and the profit or loss of the fixed term.
Thus, The general person understands that in the published financial statements of an institution, the assets and liabilities of the institution are shown at the actual value. But this assumption is not appropriate.
Because the figures mentioned in the financial statements are dependent on accounting traditions and personal decisions and the achievements themselves.
The Nature of the Financial Statement is as follows:
1. Recorded Facts
The transactions written in the books of accounts are called recorded facts.
Because when there is a transaction happens, its accounting is done in these books at the same time.
The financial statements are composed on the basis of these books or records. The figures shown in these are based on written facts.
2. Accounting Conventions
Therefore, the facts shown in financial statements are not real and absolute
For example, according to the concept of the importance of accounting. therefore, purchases of low-value items such as pens, and stationery are included in that year’s General Expenditures.
But, Wherever the purchase of expensive items like furniture, and machinery are included in the Assets.
While preparing financial statements. the accountant considers certain things to be self-fulfillment. Even if their truths are doubtful.
For example, each accountant calculates the country’s currency value level. And it does not make any difference in the transactions made in different situations.
So Similarly, on the basis of the recognition of the current status of the business, fixed assets are shown on their book value which does not match the market price.
4. Personal Judgement
The personal decision of the accountant also affects the financial statements.
There are many areas of accounting where many alternative methods of accounting are used.
For example, the stock is evaluated on the cost or the market value which is lower than the two.
The cost of the stock can be calculated on the basis of first in first out and last in first out or standard cost, average cost, etc. The basis of which to be adopted depends on the personal decision of the accountant.
Thus, Now We can say that personal decisions are a vital role in the financial statement. Because this decision affects the whole organization.
5. Accounting Concepts
Different concepts of accounting play an important role in the formulation of financial statements.
The pure writing of transactions depends only on these concepts. Based on the concept of money measurement, all transactions are expressed in the currency.
The continuity concept emphasizes the future existence of the business.
Therefore, the cost concept emphasizes the properties to be displayed at cost value.
Thus, the amount of income is fixed with the help of the recovery concept.
Thus, It is obvious that the nature of financial statements has many basic characteristics.
Purpose of Preparing Financial Statements in Business
In summary, The main objectives of financial statements are to inform the financial status of an institution and information about cash flows.
Which is useful in making financial decisions for different users.
The various objectives of financial statements are as follows:
- Show the impact of the operating profit of the institution on the financial situation.
- Providing financial data about the assets and liabilities of an institution.
- Provide adequate and relevant information to the parties having an interest in financial statements.
- Presenting the basis of future activities.
- To reveal the right and proper position of a business.
- Provide necessary information for the full use of the available and potential resources of the organization.
- Provide necessary information to estimate, compare and evaluate future cash flows in the context of various uncertainty proposals for the vendors and creditors.
- Comparing and evaluating the power of earning the organization’s profit. Presentation of the balance sheet, income statement, and financial details for future estimates.
- Providing information about all those activities of the organization
- This reflects the fulfillment of the organization’s social responsibility. Which means informing the work done by the institution to increase social welfare.
- List the creation of the work done by the institution to upgrade the social environment.
Therefore, financial statements are illustrations of the financial position of the institution and the results of actions of a time period at a given time.
In simple language, Financial information is information that is related to the financial condition of an organization.