Financial Statements in accounting

Financial Statement in Accounting

Accounting can be referred to as the process of keeping financial accounts, the process of recording the financial aspects of transactions relating to a business. Accounting is done to communicate with stakeholders of an organization the financial position, profitability and show how assets are utilized or how the economic resources of the organization are managed. Stakeholders of an organization are comprised of the consumers, employees of the organization, suppliers, creditors, investors and board of directors. 

Shareholders require information on the organization which are shown in financial statements, information provided by the organization must be relevant, reliable, comparable and comprehensible:

Relevance: the information provided for shareholders must contain the necessary information needed.

Reliable: the information provided must be free of error and must represent the actual transactions of the organization.

Comparable: the information must be comparable, in the sense that if it is being compared to the financial statement of the previous year, it must tally.

Comprehensible: the information passed to shareholders must be clear and they should have an understanding of what it entails or contains.

Financial statements follow the International financial reporting standards, they are a set of accounting rules which bring consistency and integrity to accounting practices, IFRS focuses on corporate transparency.

There are four main financial statements, statement of other comprehensive income, statement of financial position, income statement and statement of changes in equity.

1. Statement of other comprehensive income: the statement of other comprehensive income comprises the income statement and other income, it shows the organization’s performance over a period of time within a year. It shows the gross profit, operating profit, net finance cost, and profit for the year, tax and total comprehensive income for the year. The gross profit can be calculated by deducting sales from revenue, operating profit or loss can be calculated by deducting expenses from other income, net finance cost can be calculated by deducting finance cost from finance income, profit for the year is gotten after tax has been deducted, basic and diluted earnings per share shows how much is earnings per share is gotten. It gives shareholders a more understanding view of a company’s performance.

• Statement of financial position: The statement of financial position records an organization’s financial position at a point in time, it reports the company’s resources, what the company owns and sources of assets. An asset is a resource with economic value that an individual, organization owns and controls with the ultimate expectation that it will generate future benefit. Assets are used to finance an organization, it can be done through equity or liability. The income statement shows the assets which involve the non-current and current assets, total equity, total liabilities.

• Statement of changes in equity: This explains the changes in a company’s equity, it shows the changes in share capital, reserves and retained earnings over a period. It is the summary of activity in the account during a year. The statement starts by including the equity balance of the previous year then adds or subtracts profit and dividend to arrive at the end balance. It comprises equity, net income, dividends and other changes.

• Statement of cash flow: This statement reports an increase or decrease in an organization’s cash balance over a period of time. It records the inflow and outflow of operating, investing and financial activities of an organization over a period of time. It measures how well an organization manages its position, generate cash, pay debts and fund its operations. It is a mandatory part of the organization’s financial report. It contains cash flow from operating activities, cash generated from operating activities, net cash generated from operating activities, cash flow from investing activities, cash flow from financing activities and cash and cash equivalents.