A company does not exist just by itself. Not only the owners but also various other stakeholders are interested in the functioning and performance of the company. This necessitates the preparation of financial statements so as to convey the financial information to its owners and external parties conveniently.
These financial statements are the summarised end result of the books of accounts maintained by the company during the year. To ensure compliance with various laws, thesis financial statements are prepared using the prescribed accounting standards and policies.
The types of financial statements can be classified as –
The word financial statements is a compilation of the Balance Sheet, Profit and Loss account and the Cash Flow Statement.
These are not only required for stating the financial position of the company to its stakeholders but they are of utmost importance to the management of the company, as they help in serving internal needs like better decision-making for the future, planning and exercising control over the deviations.
- Balance Sheet – A balance sheet is generally prepared at the end of the year and reflects the financial position of the company. It records assets, liabilities and capital of the company. It is accompanied by the notes to accounts which contain information that is not shown on the face of Balance Sheet. It is prepared following the applicable accounting standards and the Companies Act, 2013. The format of Balance Sheet is as per the Schedule III of the Companies Act, 2013.
- Notes to Accounts – This is not exactly a separate statement but it accompanies the balance sheet and profit and loss account. The information not reflected on the face of the balance sheet and profit and loss account is grouped in notes to accounts.
- Profit and Loss Account – It indicates the profit earned or loss incurred by the company during the year. It records all revenue incomes and expenditures and the net result is either the surplus or deficit. The format of Profit and Loss account is as per the Schedule III of the Companies Act, 2013.
- Cash Flow Statement – As the name suggests, this statement is prepared to track the movement of cash/funds and any changes caused by it in the financial position of the company. This records activities of operating, investing and financing nature. At the end, this reflects the closing cash and bank balance available with the company.
Thus, every company should prepare its financial statements, i.e., the balance sheet, its notes to accounts, profit and loss account and cash flow statement following the format mentioned in Companies Act, 2013 so as to ensure easy comparison and harmonisation. Also, they help in knowing the financial position of the company so that improved steps for further development can be taken.