Meaning of Financial Statement of a company

Financial statements are those statements which provide information about the profitability and the financial position of a business. Financial statements are the summarized statements of accounting data produced at the end of the accounting process by a business firm through which it communicates the accounting information to the internal and external users. Internal users are the owners, managers and executives, whereas external users can be investors, lenders, suppliers, trade creditors, customers, government and their agencies.The term Financial Statements as used in accounting refers to two statements which every accountant prepares at the end of a given period of time for the business firm. Financial statements normally refers to two basic statements;

  1. Position Statement i.e. Balance Sheet
  2. Income Statement i.e. Profit and Loss Account.

As per requirements of Accounting Standard AS-3 (revised) every company also prepares a Cash Flow Statement which shows inflow and outflow of cash.As required by the Companies Act, 1956 the annual accounts presented by the management before the shareholders in the Annual General Meeting must also include the following reports:-

  1. Board of Director’s Report
  2. Auditor’s Report
  3. Segment Report

Features of Financial Statements

  1. Financial Statements are presented in monetary terms.
  2. Financial Statements are related to past period.
  3. Financial Statements shows financial position through Balance Sheet (i.e. Position statement) and profitability through Profit & Loss Account (i.e. Income Statement)

Nature of Financial Statements

Financial statements are based on following facts:-

  1. Based on Conventions:-Certain convention are followed while preparing the financial statements For example:-
    • Convention of Conservatism:- According to this convention provision are made for expected losses, but expected profits are ignored.
    • Convention of Materiality:- This convention is used for recording small value items like stationary goods , postage stamps etc. Expenditure on these items is recorded in the year in which they are purchased even though they are assets in nature.
  2. Based on Accounting Concepts:- A number of assumptions are followed known as accounting concepts while preparing financial statements. For example:-
    • Going concern concept:- According to going concern concept it is assumed that the business of the firm shall be continued for indefinite period.
    • Money measurement concept:- According to this concept only those transactions are recorded in the books of accounts which are expressed in money term.
  3. Based on Recorded Facts:-Financial statements areprepared on the basis of recorded facts, they do not show the unrecorded facts. For example, fixed assets are shown at their cost irrespective of their market value.