0Throughout the year, a number of Business Transactions take place. At the end of the year, any businessman would want to know whether he has made any profit during the year, and if so, what is the amount of profit that he has made. Apart from Profit, there are certain other things that a businessman would like to know, for example:
- Assets (Asset: Anything which is in the possession or is the property of a business enterprise including the amounts due to it from others, is called an Asset. Example: Cash Balance, Bank Balance, Furniture, Computers, Debtors, etc.)
- Liabilities (Liability: It refers to the amount which the business enterprise owes to outsiders. Example: Creditors, Loan taken from Bank, etc.)
This is only possible if we have a summary of the transactions that took place throughout the year. As per the definition of Accounting, it is a systematic process of identifying, measuring, recording, classifying, summarising, interpreting and communicating Financial Information.
This summary is known as the “Financial Statements”.
Therefore, “Financial Statements” is a summary report that shows how a Business has used the funds invested into it by the owner, and what is its current Financial Position. The three basic Financial Statements are:
- Balance Sheet: This shows Business’s Assets, Liabilities, and Net Worth* on a stated date,
- Income Statement (also called Profit & Loss Account): This shows how the Net Income of the Business is arrived at over a stated period, and
- Cash Flow Statement: This shows the inflows and outflows of cash caused by the Business’s activities during a stated period.
Net Worth is basically Assets minus Liabilities.
