Financial Statements refer to those statements which provide a view of the financial accounts of the business i.e. the profit earned or losses incurred in the financial year. These statements also show the financial position of the business i.e. the status of the assets and liabilities of the business.
The financial statements are of a great use in the following ways:
There are 4 kinds of Financial Statements available to the users each of them having different uses. These are:
1. Profit and Loss Statement: The Profit and Loss statement deals with the incomes, expenses, profits and losses of the business. It shows the revenue earned by the business matching with the expenses incurred to attain that revenue. Profit and Loss Statement is a comprehensive statement of all the operations carried out in the business.
2. Balance Sheet: The Balance Sheet states the Financial Position of a business i.e. the status of the Assets, Liabilities and the owner’s Equity in the business. It gives an idea whether the business is capable enough to pay out its debts and if its assets are lying idol in the business.
3. Statement of Changes in Equity: The statement of changes in equity shows the relevant changes in the equity along with the retained earnings over a period of time. This helps in determining the control of the business and checking the under capitalization and over capitalization situations of the business.
4. Cash flow Statement: The Cash Flow Statement shows the movement of cash within the business. This flow is measured under 3 main heads i.e. Operating, Investing and Financing. This ensures that the cash is utilized properly and keeps a track of the funds in the business.
In case of Companies the following vertical format of statement is adopted. It focuses on summing up all the incomes and sales and deducting from them the expenses incurred for earning such incomes and creating such sales.
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In case of Firms, the following format is followed for the calculation of the profit and loss. This format is based on the Debit and Credit rule i.e. crediting all the incomes and debiting all the expenses. The final remainder obtained is the Net Profit.
An income statement must include the following aspects for the proper ascertainment of the profit and loss of the business:
All the above stated items must be stated in an Income Statement or it would render the information to be incomplete and inappropriate for usage.
1. Revenue: The Cash Inflows or enhancement in the Trade Receivables (Debtors) due to the selling of the products or the rendering of services is referred to as Revenue. It forms the major part of the income of any business and the business sustains on the volume of its revenue.
2. Expenses: The expenses are the costs incurred to earn the income. These can be categorized as :
(i) Cost of Goods Sold: It is the cost of the products that is being sold. This cost includes the collective expenses born to bring the product to its saleable state like Material, labor etc.
(ii) Selling and general Administrative Expenses: These include the indirect expenses incurred to sell the product or maintain the office administration. For e.g. Electricity, Advertising, Stationery etc.
3. Depreciation/Amortization: Depreciation means the wear and tear of Tangible assets. It is the reduce in the value of the asset.
Amortization refers to the decline in the value of the Intangible Assets.
Thus Income Statement provides a lot of useful information but still it lacks back in some field as:
Thus a business’s functioning is highly reliable on the analysis of the income statement. The calculation and analysis of the income statement can be a tricky task. But we are here to help you at assignmenthelp.net where you can contact us at anytime and we will help you with your queries and helping you out with your assignments. We respect that you can’t lose on marks and that is why we are here to provide you with the best facilities and qualitative results. You can also take online classes from the best tutors. We believe in providing the best services for your satisfaction. We serve our clients with good and satisfying work and with complete dedication.
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