Company’s true and fair view of financial performance can be judged by its financial statements. The financial not only depicts the profit & losses but also the assets and liabilities of the company. Howsoever, one can only get the financial statements at the end of the financial year. Here is the meaning, nature and objective of financial statements.
Meaning of Financial Statements
Financial statements are essentially reports that portray the financial data of an organization. The administration of the organization utilizes these financial statements to speak with outer partners. These consist, investors, financial or tax specialists, regulatory authorities, creditors, and so forth.
Financial statements have three parts and these are:
Financial Statements Nature
The financial statements are prepared using the facts concerning financial events, which are recorded sequentially. We need to initially record every one of these financial transactions. At that point, we need to process them utilizing every single material rules and methods. At last, we would now be able to utilize this information to produce financial statements.
In view of this comprehension, the nature of financial statements relies upon the accompanying focuses:
We have to initially record the financial transaction in the journal and ledger to make financial statements. For this, we have to represent figures of records such as cash, fixed assets, bills receivables, and so forth.
There is a certain convention that is followed at the time of bookkeeping. We need to apply these conventions while financial statements preparation. For instance, the valuation of stock at cost or market price, contingent upon whichever is lower.
Assumptions play an important role in the financial statements preparations, apart from conventions. Postulates are essentially assumptions that one makes in the process of accounting. For instance, the going concern postulates assume that an organization will continue to exist for quite a while.
Even personal judgements and opinions play an important role in financial statements preparation. Accordingly, we need to depend on the approximate evaluation while computing things such as depreciation.
As we have already discussed the meaning and nature of financial statements, now let us move further to the objectives of financial statements.
Objectives of Financial Statements
The owner and stakeholder of an organization usually depend on financial statements to comprehend the working of the organization. Through financial statements, they could easily depict the organization’s true state of affairs. Here are a few objectives of financial statements:
- Financial statements demonstrate the precise condition of assets and liabilities of an organization. External users like tax and financial specialists, for the most part, don’t have this data generally.
- They help in anticipating the degree of an organization’s ability to earn profits. Investors and shareholders can utilize this information to settle on their financial decisions.
- Financial statements of an organization portray the adequacy of its administration. How well an organization is performing relies upon its productivity and profitability which these statements show.
- They even help users of these statements know the accounting methods and policies utilized in them. This assists in understanding the financial statements extensively.
- These statements additionally give cash flow information of the organization. Financial specialists can utilize this information to anticipate the liquidity and cash needs of an organization.
- At last, financial statements clarify the social effect of organizations. This is on the grounds that it demonstrates how the external factors influence the working of an organization.