Objectives of Financial Statements

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Just as everything has objectives, financial statements also have objectives. Business cannot account for anything unless a system is used, that is why accounting systems are used to understand economic transactions in business. Financial statements are prepared under the accounting system.

Many statements are prepared under financial statements like balance sheet, profit and loss account, trading account, manufacturing account, cash flow statement, etc. All the statement of financial statements plays an important role in understanding the business, like financial position, flow position, growth rate, etc.

Objectives of Financial Statements

Following are the objectives of financial statements:

1. Financial Position:

The financial position of any business can be known only from the financial statements because financial statements are the summary of the economic transactions of the business, that is why businesses give more emphasis in preparing financial statements. Financial statements are prepared with the help of all the economic transactions taking place in the business. Before preparing financial statements, economic transactions are identified, measured, recorded, classified, etc.

2. Financial Performance:

It is very important for the concerned persons to know about the financial performance of the business because financial performance shows how the business is running. Financial statement is used to know about the financial performance because under it many statements are prepared which show the financial performance of the business, like income statement, balance sheet, cash flow statement, etc.

3. Attract External Resources:

Financial statements help in attracting external resources like investors, lenders, etc. as it show the financial position and performance of the business. Whenever someone wants to join a business, he first wants to know more about the business so that he can secure his investment, for this the financial statements of the business help.

4. Tax Calculation:

Everyone who is liable to pay tax has to pay tax as it is compulsorily enforced by the governing authority. Financial statements help in calculating tax as it is the end result of business transactions. If the Profit and Loss Account shows profit then the business will be liable to pay tax and if the Profit and Loss Account shows loss then the business will not be liable to pay tax (only if applicable).

5. Planning:

Financial statements help in planning because financial statements provide data for planning. All the statement of financial statements play an important role in planning like profit and loss account provides data of profit and loss, trading account provides data of purchases and sales etc., balance sheet provides data of liabilities and assets.

6. Management:

Anything can be managed only when there is information about it. Financial statements reflect the financial position and performance of a business using which finance related functions can be managed. For example, Profit and Loss Account shows data of income and expenses using which income and expenses can be managed similarly Trading Account shows data of purchases, sales, etc. using which purchases, sales, etc can be managed.

Read Also:

• What are Financial Statements? Meaning, Features, and More.

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