♦ What will tell us the business is good or bad?
♦ What will show us the true picture of the business performance?
♦ How can we know is business complying with the various law?
♦ Is there any statement which can satisfy the stakeholders?
♦ From where we can get the knowledge that business is good for investing or not?
Well, the answer of all above questions is Financial Statement. The term “Financial Statements” is very new to a layman or a person who is non- commerce background or never deal the accounts. Here i am trying to clear the basic terms of Financial Statements.
Answer: Financial Statements are the written records of all financial data that tell us the business activities and its performance. It is prepared for stakeholders (stakeholders means government, shareholders, investors, creditors etc. all who interested in company), that is why it is necessary to take due diligence in the preparation of it. The information contained in should be authentic, reliable, realistic because it’s important tool for decision makers. There are standards provided by Ministry of Corporate Affairs (MCA) and Institute of Chartered Accountants of India (ICAI) which are followed by all companies, organisational bodies, partnership and sole proprietorship firms.
Answer: Financial Statements includes Balance Sheet, Profit and Loss Statement/Income Statement, Statement of Changes in Equity, Cash Flow Statements. The all have standard format prescribed by the government to ensure the uniformity and to make easy to understand.
Answer: Balance Sheet represents the balances of assets, liabilities and capital of a business organisation on a particular day. It shows the financial data as on date, not for the period. Therefore the heading of balance sheet is Balance Sheet of ABC Ltd. as on the 31.03.2xxx. But it does not mean that the this can not be prepared on any another day. It can be prepared on monthly, quarterly, semi annually or annually. Moreover, it can be prepared on any day on the demand of management to take decisions. For example: The Management of ABC Ltd wants to take review the performance of business on 15th of July. Then the balance sheet prepared on 15th of July shows the balances of assets, liabilities and capital on that day.
Answer: Balance sheet has three components i.e. Assets, Liabilities and Capital and each component has their own components. Let’s understand the main 3 components.
1. Assets: Asset means what an organisation own. For example you bought a LCD of Rs. 40,000/-. Now the LCD is your asset. It’s your property. In similar way assets are the property of the business organisation. It may be the asset which can be used within year, their life not more than 12 months. These kind of assets are known as Current Assets. and On the contrary the assets those have a life more than 12 months are known as Fixed Assets. Examples of Current Assets are Inventory, Cash and Cash equivalents, Short term Loans and Advances, Trade Receivables, Other current assets. Examples of Fixed Assets are Property, Plant and equipment, Tangible assets, Intangible Assets etc.
2. Liabilities: Liabilities means what an organisation owe. In the furtherance of above LCD example you bought that LCD on credit. Now you are liable to pay Rs. 40,000/-Similarly organisations take loans, borrow money or amount payable which must require to pay. Like assets liabilities have two types long term and short term. Liabilities more than 12 months is long term and other are short term liabilities. Example of Long term liabilities Debentures, Term loan from banks, NBFC etc. Example of Short term liabilities are Account payable, Trade payable, Bank overdraft, Short term provisions, Other short term liabilities.
3. Capital: Capital means cash or other assets introduced into the business by owners. It includes surplus of profit also. It is useful in further development and generating income. It is used to increase the value of company. In the company there is share capital, and in partnership firm Partners’ capital, in proprietorship Proprietor capital.
In the balance sheet Total of assets equals to liabilities and capital or vice versa. We can say
Assets = Liabilities+ Capital
Liabilities = Assets – Capital
Capital = Assets- Liabilities
Answer: Profit and loss statement shows the all revenues and expenditure through out the accounting period i.e April to march. Like a balance sheet it does not show the balances on the particular day. It shows the data for the period and this period may be monthly, quarterly, semi-annually or annually. Therefore in the profit and loss statement heading is Profit and loss of ABC Ltd for the period 1 April, 2xxx to 31 March, 2xxx. By using this statement company analyse where they are in profit or loss and accordingly decisions are taken. Where Revenue> Expenditure, profit and Revenue< Expenditure, loss.
Answer: Statement of Changes in Equity shows the reconciliation of owner’s equity or shareholders’ equity, Reserves, Retained earnings. In partnership and proprietorship this statement is prepared with in the balance sheet, on the contrary in companies it is shown as separate statement under the heading Statement of Changes in Equity of ABC Ltd as on 31.03.2xxx.
Answer: Cash Flow Statement represents the flow of cash during the period. It shows the aggregate picture of all inflows of cash from its operations and other investment sources and all outflows i.e cash payment for its operations and investment. It may be prepared by using Direct method and indirect method. There is three activities are considered under this statement. These are operating activities, investing activities and financing activities.
Each statement will be discussed in detail in further articles. #Happylearning.