The financial report is a document that tells the financial story of an organization. It shows how healthy and viable a business is. This document enables investors to assess their risk, evaluate the business and then decide to invest in the business or not. This report is made up of 5 key statements
- The statement of Financial Position or Balance Sheet
- The Statement of Profit or Loss (Income Statement)
- The Statement of Owners Equity
- Statement of Cash Flow
- Other notes to the accounts
These statements are presented in comparison with the previous year. The Statement of financial position(SFP)n is of interest to me because I believe it shows the financial strength of an organization in terms of the assets the organization has, the total equity of the investors and the total liability of the organization. The Assets, the liability and the Owners equity makes up the key account in this financial statement. From this statement came the fundamental accounting equation which states that;
ASSETS = LIABILITY + OWNESRS EQUITY.
Assets in financial accounting are any resource owned and controlled by a business. They are classified into 2 main types: The Current Assets and the Non-Current assets. The current assets are expected to be consumed within one year, and commonly include the following items: Cash and cash equivalents, marketable securities prepaid expenses, accounts receivable and inventories. Whereas the Non-Current assets also known as long-term assets are expected to continue to be productive for a business for more than one year. Examples of these assets included tangible fixed assets such as buildings, equipment, furniture, land, and vehicles. Intangible fixed assets such as patents, copyrights, trademarks, Goodwill, etc. There is a further classification of the assets, but I will not go deep into the subdivisions of the assets as an account. Just pardon me now, I am not an accountant.
The second account fountain in the balance sheet is the Liability. This is something an entity owes, usually a sum of money. Most businesses startup with loans, either from banks or other agencies. These loans are liabilities to the organization, and they are usually paid overtime. Going back to the fundamental accounting equation and the variable called liability in the equation, I asked the facilitator, if it is possible for one to start up a business with all the funding by himself, without taking any loan? Of course, it is very possible, and a lot of businesses started that way. That was the response I got from the facilitator. Then I go again, If I should fund my business without any loan, does that not void the fundamental accounting equation? If only I remember my algebra, I would not have asked that question. Certainly, the equation remains valid. If I set up and run my business without any form of loan, then Liability equals Zero.
The third account is the Owners’ Equity. A simple analogy will be five friends contributing the sum of 100,000.00 naira each to start up a dry-cleaning business. The total sum of their contribution is the owner’s equity on the balance sheet. This can also be seen as the amount of money invested by the owner in the business minus any money taken out by the owner of the business.
In reporting the SFP in the annual financial report, one should take note that apart from placing the figures of the reported year in the first column, the SFP is the only statement that is presented as at the financial year-end. Other statements are presented to show the figures within a period.
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