Class 12 Accountancy Part 2 Chapter 3 Financial Statements of a Company

Financial Statements of a Company

Financial statements are written documents that transmit the financial pursuits and conditions of a trading concern or entity and comprise of 4 major elements. Financial statements are usually meant to furnish the financial data of the enterprise in question as precisely and concisely as feasible for both the enterprise and for the readers.

Financial statements for trading concern normally comprise balance sheets, statements of retained earnings, cash flows and income statements but might need further elucidated acknowledgements relying upon the appropriate accounting groundwork. These statements are audited by government firms, accountants, agencies, etc. to make sure the certainty and for tax, financing or investing intentions.

Also Check: Balance Sheet vs Financial Statement

Nature of Financial Statements

Financial statements are outlined utilising the facts that are associated with the events, which are documented sequentially. We have to document all these data in monetary terms. Later, we have to process them utilising all pertinent standards and decrees.

Finally, we can utilise all this information to create financial statements. To put it in other words, the chronologically documented facts regarding occurrences conveyed in monetary terms for a certain time frame are the foundation for the outlining of journal financial statements which acknowledge the financial position as on a particular date and the financial outcomes acquired during a period.

The American Institute of Certified Public Accountants(AICPA) states the nature of financial statements as, “the statements outlined for the intention of declaring a periodical analysis of the report on development by the management and in accordance with the condition of investment in the trade and the outcomes accomplished during the period under analysis. They mirror a combination of accounting principles, personal judgements and documented facts”.

Grounded on this, the nature of financial statements relies upon the below-mentioned following points:

  • Recorded facts: We have to initially document certainties in monetary terms to establish financial statements. For this, we have to explain for figures of accounts like cash, trade receivables, fixed assets, etc.,
  • Accounting conventions: Accounting Standards determine specific conventions that are pertinent in the procedure of accounting. We have to apply these conventions while outlining the financial statements. For instance, relying upon whichever is lower, estimation of inventory at cost price or market price.
  • Postulates: Postulates play a huge role in the process of preparing financial statements. They are assumptions that we usually make in accounting. For instance, the going concern postulate assumes a trading concern will exist for a long time. Hence, we treat assets on a historical cost basis.
  • Personal judgements: Personal judgements and opinions occupy a huge role in the outlining of financial statements. Hence, we have to depend on our own approximates while computing depreciation.

Let us now understand each concept of Financial Statements of a Company in detail:

Objectives of Financial Statements of a Company

Financial statements are the fundamental sources of data to the shareholders and other external parties for comprehending the profitability and financial position of any trading concern. They furnish data about the outcomes of the trading concern during a particular time frame in terms of assets and liabilities, which furnish the foundation for taking decisions.

Hence, the primary goal of financial statements is to help end-users in their decision-making. The particular objectives comprise the following:

  • Financial statements depict the precise condition of an enterprise’s economic assets and liabilities. External stakeholders, like investors and authorities, do not have this data.
  • They assist in anticipating the degree of an enterprise’s capability to earn profits. Investors and shareholders can utilise this information to ascertain their financial decisions.
  • Financial statements of an enterprise show the efficiency of its management. How well an enterprise is functioning relies upon its profitability, which these statements depict.
  • They assist readers of these statements in being aware of the accounting strategies used in them. This assists in comprehending the statements more predominantly.
  • These statements also furnish data that is associated with the enterprise’s cash flows. Creditors and investors can utilise this information to anticipate the enterprise’s cash requisites and liquidity.
  • Finally, financial statements elucidate the social effect of businesses. This is due to how the enterprise’s external aspects influence its operations.

The above mentioned is the concept, that is elucidated in detail about the Financial Statements of a Company for the Class 12 Commerce students. To know more, stay tuned to BYJU’S.


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