A firm communicates to the users through financial statements and reports. The financial statements contain summarized information of the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management. They should be prepared very carefully and contain as much information as possible.
Two basis financial statements prepared for external reporting to owners, investors and creditors are:
- Balance sheet (or statement of financial position): Balance sheet contains information about resources and obligations of a business entity and about its owners’ interests in the business at a particular point of time. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
- Profit and loss account (or income statement): The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for a period of time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.
More information is required for planning and controlling and therefore the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management. Financial statements are prepared from the accounting records maintained by the firm.
The various objectives of financial statements are:
- To provide reliable financial information about economic resources and obligations of a business enterprise.
- To provide reliable information bout changes in the resources (resources minus obligations) of an enterprise that result from the profit-directed activities.
- To provide financial information that assists in estimating the earning potential of the enterprise.
- To provide other needed information about changes in economic resources and obligations.
- To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users.
- Beginners’ Guide to Financial Statements (SEC.gov)