Every business record and manage transactions to prepare financial statements because financial statements talk about the position of the business. Financial statement is not only helpful for the business, but it is also helpful outside the business because with its help one can know about the business. Financial statements help in attracting investors, lenders etc.
Business is an artificial person due to which it can neither think nor speak, that is why accounting is used with the help of which business can be understood in numbers. Accounting involves many processes like identifying, measuring, recording, classifying, summarizing, analyzing, interpreting, communicating, etc. Of these, financial statements are prepared under the summarizing process.
Table of Contents
What are Financial Statements?
Meaning of Financial Statements
Financial statements are a group of statements as it includes various statements like balance sheet, profit and loss account, trading account, manufacturing account, cash flow statement, etc. It is prepared with the help of accounting data like data from ledger accounts, subsidiary books etc. and is prepared by the management of the business. Management may be internal or external.
Generally, financial statement is prepared at the end of the financial year, but some businesses prepare it periodically like weekly, monthly, quarterly, half-yearly, annually etc. The main objective of preparing financial statements is to know about the position of the business and it helps in attracting external sources like business opportunities, lenders, investors etc.
Definition of Financial Statement
According to the American Institute of Certified Public Accountants (AICPA) – “Financial Statements are prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the status of investment in the business and the results achieved during the period under review. They reflect a combination of recorded facts, accounting principles, and personal judgments.”
According to own words – “Financial statements are a set (group) of statements prepared by the management of a business (organization) from accounting data, which are used to know about the status of the business (organization).”
Features of Financial Statements
Following are the features of financial statements:
1. Group of Statements:
Financial statements are a group of statements as it includes various statements like manufacturing account, trading account, profit and loss account, balance sheet, cash flow statement, etc. All the statements of the financial statements play a very important role in understanding the position of the business.
2. Summary of Data:
The financial statements are a summary of the data because it includes only the head of accounts. All the necessary tasks like identifying, measuring, recording, classifying transactions, etc. are already completed so that financial statements can be prepared easily. Only when the transactions are classified, financial statements are prepared because, without classification of transactions, financial statements cannot be prepared.
3. Based on Data:
Financial statements are based on data as it is prepared on the basis of data from ledger accounts, subsidiary books, etc. If the data is wrong then the financial statements will also be wrong, similarly if the data is correct then the financial statements will also be correct because the result of the financial statements will be the same as the data will be.
4. Manipulation:
Data manipulation is the biggest problem in the market as some businesses manipulate accounting data to get resources from outside and avoid taxes. The main objective of data manipulation is to create false financial statements because financial statements show the status of the business, and all outsiders make decisions according to the financial statements of the business.
5. Business Status:
Financial statements reflect the status/position of the business as it contains all the data of business transactions. Financial statements reflect the true position of the business only when all the data of business transactions are correct. If incorrect data is used the financial statements will misrepresent the position of the business.
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QNA/FAQ
Q1. What are Financial Statements?
Ans: Financial statements are a group of statements as it includes various statements like balance sheet, profit and loss account, trading account, manufacturing account, cash flow statement, etc.
Q2. Are financial statements prepared under the summarizing process?
Ans: Yes, financial statements are prepared under the summarizing process of accounting, and it is prepared after the classification of transactions.
Q3. Are financial statements a set/group of statements?
Ans: Financial statements are a group of statements as it includes various statements like manufacturing account, trading account, profit and loss account, balance sheet, cash flow statement, etc.
Q4. Do the financial statements reflect the position of the business?
Ans: Yes, financial statements reflect the position of the business as it contains all the data of business transactions.
Q5. Write the features of financial statements.
Ans: Following are the features of financial statements:
1. Financial statements are a set/group of statements.
2. Financial statements are a summary of data.
3. Financial statements are based on data.
4. Financial statements can be manipulated.
5. Financial statements show the position of the business.
