INTRODUCTION TO FINANCIAL STATEMENTS.
What are Financial Statements?
Financial statements of an organization are the basis of data required for financial decision making. As such, correct understanding of the structure of the financial statements and also of the tools available for the interpretation of financial statements is a must before one talks of any of the further discussions on financial management.
Nature of financial statements
Any organization doing business whether it is manufacturing activity or trading activity or service activity, is interested in knowing basically two facts the business
1 Where the business stands at any given point of time in financial terms
2 What is the result of operation carried out by the business organization during a specific period .
In order to answer these two questions, the organization carries out the process of recording various transactions in a defined set of records, technically referred to as “accounting” which effectively results into the preparation of what are called as financial statements. These financial statements are basically in two forms.
A. First financial statement is balance sheet. This is the answer to the first question that is where the business stands in financial terms. Balance sheet informs about the various sources used by the organization to raise the funds which technically result into what are referred to as “liabilities” and the way these sources are used which technically result into creation of assets. Sometimes balance sheet is also referred to as “Statement of Sources and Application of Funds”. Effectively, Balance sheet is a listing of various assets and liabilities of the organization at any given point of time. Technically, Balance sheet is a position statement in the sense it refers to a particular date. As such balance sheet is referred to as “Balance Sheet as on __________” or “Balance Sheet as at____”
B. Second financial statement is profitability statement. In technical language, it is referred to as “ Profit and Loss account. This is the answer to the second question that is what is the result of operation of the business during the specific period that is whether the operation have results in to a profit or lost and by what amount. This may be a month , a quarter, half year or a year depending upon the organization and the purpose for which it is prepared. As such, Profitability Statement is referred to as “Profit and Loss Account for the year ending on _____”
Basic Principles behind the preparation of Financial Statements-
The theory and practice of preparation of financial statements is based upon certain basic assumptions which are referred to as concepts, principles, conventions or rules. For convenience purposes, we will term them as “concepts
What are Financial Statements?
Financial statements of an organization are the basis of data required for financial decision making. As such, correct understanding of the structure of the financial statements and also of the tools available for the interpretation of financial statements is a must before one talks of any of the further discussions on financial management.
Nature of financial statements
Any organization doing business whether it is manufacturing activity or trading activity or service activity, is interested in knowing basically two facts the business
1 Where the business stands at any given point of time in financial terms
2 What is the result of operation carried out by the business organization during a specific period .
In order to answer these two questions, the organization carries out the process of recording various transactions in a defined set of records, technically referred to as “accounting” which effectively results into the preparation of what are called as financial statements. These financial statements are basically in two forms.
A. First financial statement is balance sheet. This is the answer to the first question that is where the business stands in financial terms. Balance sheet informs about the various sources used by the organization to raise the funds which technically result into what are referred to as “liabilities” and the way these sources are used which technically result into creation of assets. Sometimes balance sheet is also referred to as “Statement of Sources and Application of Funds”. Effectively, Balance sheet is a listing of various assets and liabilities of the organization at any given point of time. Technically, Balance sheet is a position statement in the sense it refers to a particular date. As such balance sheet is referred to as “Balance Sheet as on __________” or “Balance Sheet as at____”
B. Second financial statement is profitability statement. In technical language, it is referred to as “ Profit and Loss account. This is the answer to the second question that is what is the result of operation of the business during the specific period that is whether the operation have results in to a profit or lost and by what amount. This may be a month , a quarter, half year or a year depending upon the organization and the purpose for which it is prepared. As such, Profitability Statement is referred to as “Profit and Loss Account for the year ending on _____”
Basic Principles behind the preparation of Financial Statements-
The theory and practice of preparation of financial statements is based upon certain basic assumptions which are referred to as concepts, principles, conventions or rules. For convenience purposes, we will term them as “concepts