Meaning
Financial Statements are the prepared at the end of the accounting period to show financial performance during the accounting period and financial position of the business as on date . A complete set of Financial Statements includes .
1. Balance sheet
2.Profit and Loss Account .
3. Schedule and notes forming part of Balance sheet and profit and loss Account .
They are also known as final accounta .
Financial Statements are the end - product of the accounting functions , drawn from the Trial Balance .They are prepared to know :
1. The profit earned or loss incurred from the business operations during an accounting period . It is known from the Profit and Loss Account . Few enterprises also prepare Trading Account in addition to the profit and loss Account ,and
2. The financial position , by preparing the Balance Sheet .
Objectives and importance
The objectives and importance of the Financial Statements are :
(a) Profit and Loss Account
1. Determine Gross Profit or Gross Loss :
Trading Account, which is a part of profit and loss Account , is prepared to know gross profit earned or Gross Loss incurred by the business the accounting period . It shows whether sales generates adequate profit to meet other operating expenses and expansion plans .
2. Determine Net Profit or Net Loss :
Profit and Loss Account shows net profit earned or net Loss incurred by the business during the accounting period.
3. Comparison with the Previous Years Profit :
Profit determined by the Trading Account and Profit and Loss for the accounting period can be compared with that of previous year's profit.It helps in determining whether the business is progressing as per plans or not .
4. Details of Indirect Expenses :
Indirect expenses are shown in the profit and losss Account . These expenses may be compared over the period and suitable steps may be taken for exercising control on them .
5. Maintaining Reserves :
To meet future uncertainties and to strengthen financial position of the firm , reserves are set aside out of profits . The amount set aside as reserves depends upon net profit earned .
6.Calculation of Ratios :
For financial analysis , several ratios are calculated with the helps of information / data available in the profit and loss Account.
For example , Net Profit Ratio , Operating Ratio , Return on capital Employed , etc
(b) Balance Sheet
1. Ascertaining Financial Position :
Balance Sheet is a part of Financial Statements that's shows the financial position of the business on a particular date under various heads . If assets are more than outside liabilities,the business is considered to be in sound financial position .
2.Comparison with Previous Years :
The amounts under various heads of Balance Sheet can be compared with that of previous year to assess the change in financial position .
3. Analysis of Individual Items :
An analysis of Individual Items of Balance Sheet can be carried out to ascertain whether long - term funds (long term ,loans , capital etc .) have been invested in long term assets , wheather the current assets are realised as stipulated , wheather the business has sufficient working capital , wheather appropriate credit period is enjoyed ,etc .
4. Calculating Ratio :
Balance sheet enables calculation of financial position ratios such as Debt. Equity ratio ( to determine whether debts are sufficiently covered ); current ratio ( to determine working capital adequacy ) ,etc . Ratio analysis helps analysing over or under investment in fixed assets , working capital , etc ., and in the process helps in taking appropriate decisions.
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