Page 151 - DMGT104_FINANCIAL_ACCOUNTING

Unit 8: Financial Statements

8.1 Meaning of Financial Statements Notes

Financial statements mean (i) Balance sheet, (ii) profit & loss account, and (iii) several other
schedules. Nowadays one more statement is also prepared that is funds flow statement or cash
flow statement.
Whatever business activities are done, it is essential to know its operational results i.e. whether
business is running at profit or loss, for this purpose balances of all ledger accounts are taken and
a statement of balances is prepared which is known as trial balance. Final accounts are prepared
from such balances. Therefore, it is necessary to know the meaning and object of final accounts.
Final accounts mean profit & loss account and the balance sheet. Profit & loss account also
contains one more account, known as Trading account, and if the business is manufacturing any
item or article, then Manufacturing account is also there. All these accounts are prepared only
after preparing trial balance.
8.2 Objectives of Preparing Final Accounts

There are two objectives of preparing Final accounts- (1) know the operational results i.e. profit
or loss during a particular period through the profit & loss account which is also known as
income statement, and (2) ascertain the financial position of the business on a particular date
through the balance sheet, also known as position statement.

Persons Interested in Financial Statements

Did u know? There are two types of persons interested in financial statements—1. Internal
users and 2. External users.
1. Internal Users: These are (a) Shareholders, (b) Management, and (c) Trade unions
employees.
(a) Shareholders are very much interested in the financial statements. They are
very much interested in the welfare of the business. They can know the
operational results through such financial statements and the financial position
of the business along with the earning capacity of the business.
(b) Management is interested to take important decisions relating to fixing up the
selling prices and making future policies.

(c) Trade unions and employees are interested to know the operational results
because their bonus etc. is dependent on the profit earned by the business.
Financial Statements also help in their negotiations for wages/salaries.
2. External Users: There are number of persons interested in financial statements. They
are termed as external users. The following are most important external users of
financial statements.
(a) Investors: They are interested to know the earning capacity of business which
can be known through financial statements. They can also know the financial
soundness of the business through financial statements.
(b) Creditors, Lenders of Money etc.: The creditors and lenders of money etc. can also
know the financial soundness through financial statement. They have to see
two things (i) Regularity of income and (ii) solvency of the business so that
their investment is risk free.

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