The accounting process ends with the preparation of the financial statement. The information about the financial position of any company is provided with the help of financial statements. The main objective of preparing the financial statement is to present a true and fair view of the financial performance and position. Accounting data is summarised in such a way that the profitability of the business is clearly visible. It also serves as an information tool for all the parties concerned with the firm. To guarantee consistency in reporting, these statements; which include an income statement, balance sheet, and statement of cash flows, must be prepared in accordance with predetermined and established accounting principles and conventions.
Objectives of Financial Statements:
- Provide Information on Financial Position: Financial statements show the financial position of a business by presenting its assets, liabilities, and capital at a particular date. This helps users understand what the business owns and owes, and how strong its financial base is.
- Provide Information on Financial Performance: Financial statements explain how well a business has performed during a specific period by showing profit or loss. This helps in evaluating the efficiency and profitability of the business operations.
- Provide Information on Cash Flows: Financial statements provide details about cash inflows and outflows from operating, investing, and financing activities. This helps in understanding how cash is generated and used in the business.
- Assist in Decision-Making: Financial statements provide useful information to different users like investors, creditors, and management so they can make informed economic decisions such as investing, lending, or managing resources
- Assess Stewardship and Accountability: Financial statements help in checking how effectively management has used the resources given by owners. It ensures accountability and transparency in business operations.
- Facilitate Comparison: Financial statements allow users to compare the performance of a business over different accounting periods and also with other similar businesses. This helps in analysing growth and performance trends.
- Support Planning and Forecasting: Financial statements provide historical financial data which helps management in preparing budgets and making future plans for the business.
Characteristics of Financial Statements:
1. Recorded Facts: The financial statements of a business concern are nothing but a compilation of the recorded facts and figures pertaining to various transactions entered into by an organisation. Recorded facts refer to the information extracted from the financial transactions of an enterprise.
2. Accounting Conventions: These refer to certain guidelines and a kind of course of action to be followed for the purpose of preparation of financial statements. Some of the conventions are materiality, conservatism, consistency, and full disclosure. It is imperative that recording in books of accounts should be done following these conventions in order to tackle any complicated or unclear business transactions.
3. Accounting Concepts: These refer to the generally accepted assumptions or rules or guidelines, which assist an accountant in the process of preparation of financial reports. They can be termed as basic building blocks for the recording of transactions in the books of accounts, which further makes the base for the preparation of financial statements. It is important that an accountant follows these concepts so as to maintain objectivity and neutrality in the accounting records and financial statements.
4. Accounting Standards: An accounting standard is a collection of procedures and guidelines used to standardise bookkeeping and other accounting operations over time and across different businesses. All aspects of an entity's financial picture, including its assets, liabilities, income, outlays, and shareholders' equity are subject to accounting standards. It is very important for accountants to comply with various accounting standards mentioned in the Company's Act, 2013 for recording transactions in the books of accounts to ensure verifiability and consistency in reporting practices.
5. Selection of Accounting Policies: Accounting policies pertain to the different methods or techniques of dealing with certain items while recording them in the books of accounts. For example, an organisation might follow either the straight-line method or the written-down value method of depreciation. Another instance is the choice of the basis of accounting which could be: cash or accrual or a hybrid of these. These policies get reflected in the financial statements and inform the stakeholders about the policies being adopted by the organisation.
6. Estimates: While preparing financial statements a business concern might make certain assumptions or postulates. One such major assumption is the going concern concept of accounting. Here, the business is considered to be a going concern, meaning such an organisation would continue its operations for an unforeseeable period of time and would not stop in the nearby future. As a result of this, the span of recording and financial reporting is set to be one year. Estimating the useful life of an asset to provide depreciation, is yet another example of Estimates in accounting.
7. Source of Financial Information: Financial statements provide useful information to the management of an organisation for the purpose of planning, controlling, analysing, and decision-making. They also facilitate prospective investors in making rational decisions about their investments based on the reports.