Financial Statements and Reporting must be done by every organization, regardless of location, industry or size. as a business owner, its your duty to ensure that your financial statements are written in a manner that can be easily understood by various stakeholders. And that includes your income statements, balance sheets, statements of retained earnings and cash flows.
Your financial statement would be required for auditing by government agencies or other accounting firms for various reasons. Some of the key purposes of financial statements are:
- It determines the ability of your business to generate cash. Also to verify the sources and uses of that cash.
- Tracking your financial results and discover any possible issues.
- Investigating the details of particular business transactions.
- Determining whether your business has the capability to pay back its debts.
- Allowing for proper analysis of the financial condition of your business.
the financial statement for your business consists of:
The Income Statement/Profit and Loss Statement
The Income Statement, also called the Profit and Loss Statement, shows the revenues, expenses, and profits/losses generated during the reporting period. In plain terms, it reports the organization’s financial performance in terms of net profit or loss over the specified period. It is often considered the most important of the financial statements and reporting, since it presents the operating results of the organization.
The Income Statement is composed of two main parts:
- Income: This shows what the organization has earned over a period.
- Expense: This shows the cost incurred by the organization over a period.
The net profit or loss is calculated by deducting the expenses from the income.
The Balance Sheet/ Statement of Financial Position
The Balance Sheet, also called the Statement of Financial Position, presents the assets, liabilities, and equity of the organization as of the date of reporting. The report is structured such that the total of all assets equals the total of all liabilities and equity. The three important parts of the Balance Sheet are:
- Assets: This states everything the organization owns or controls.
- Liabilities: This states everything the business owes to another party.
- Equity: This states everything the business owes to its owners. This is basically the amount of capital that remains in the business after the assets are used to pay off its outstanding liabilities. This means that the equity equals the difference between your assets and liabilities.
The Balance Sheet is usually considered the second most important financial statement because of the information on the liquidity and capitalization of your organization.
The Cash Flow Statement
The Cash Flow Statement shows the cash inflows and outflows that occurred during the reporting period. It simply reflects the movement in cash and bank balances over a period. This statement can be used to compare the income statement. It may be presented when issuing financial statements to outside parties.
The movement in cash flows can be classified according to the following activities:
- Operations: This is the cash flow from the main activities of your business.
- Investments: This is the cash flow from the purchase and sale of assets other than inventories.
- Financing: This is the cash flow generated or spent on raising and repaying share capital and debt as well as payment of interests and dividends.
The Statement of Changes in Equity/Retained Earnings
The Statement of Changes in Equity, also called the Statement of Retained Earnings, shows the changes in equity during the reporting period. This is derived from the following components:
- Net Profit or loss during the period (as reported in the income statement).
- Share capital issued or repaid during the period.
- Dividend payments.
- Gains or losses identified in equity.
- Effects of a change in accounting policy or correction of accounting error.
As a professional accounting firm, Da’Cliche Concept can help your organization develop a proper set of financial statements as relevant for whatever purpose is required. We can also serve as consultants to advice you on the appropriate method for preparing your financial reports. Contact us for more information on how else we can help you.