Understanding the Preparation of Financial Statements in India
Whether it is a small-scale business or a large multinational company, financial statements are essential. They can never be underestimated, and the preparation of financial statements in India. Usually, these financial reports and statements are prepared on a monthly, quarterly, or annual basis and allow related stakeholders to quickly assess how well the business is doing and how it compares with the prior year. Financial results are also known by various terms, though having the same function, depending on the company or form of organization. It includes statements of income, balance sheets, statement of cash flow, statement of equity of the stockholders, statement of the flow of funds etc. Numbers revealed through these financial statements play a significant role in decision making and help the leadership group swiftly adjust to market demands.
At 3E Accounting, we have extensive experience working with businesses and investment funds and providing them with the highest quality services in preparing financial statements. We have the necessary technical skills and knowledge to make timely financial reports.
Development of accounting standards includes a procedure, and the implementation of any process requires a few guidelines. Taking this into perspective, the Accounting Standards Board (ASB) of Institute of Chartered Accountants of India (ICAI), which is the country’s most achievable accounting body, came up with a system which gives the fundamental basis for the development of new standards and appraisal of the existing ones. In this article, we review some of the fundamental views based on which financial statements are arranged and presented.
Components of Financial Statements
Financial statements usually consist of the following:
- Balance Sheet – A balance sheet depicts the value of economic resources controlled by an enterprise, as well as the liquidity and solvency of an enterprise. This is used to evaluate the ability of the enterprise in meeting its financial responsibilities.
- Statement of Profit and Loss – Portrays the outcome of the functioning of the organization.
- Cash Flow Statement – Outlines the way of determination of income, as well as its usage.
- Notes and Schedules – Provide supplementary information explaining different modules of financial statements. A few examples can be risks and unreliability affecting an enterprise, accounting policies etc.
Objectives of Financial Statements
Financial statements are arranged to give information that suits the typical needs of all users. Users of these could be:
- Suppliers and other trade creditors
- Government and their agencies
It is recommended that the financial statements be prepared according to the assumptions that have been established. In this situation, the annual statements are typically compiled under the basis that the company can continue to function in the near term, so there is no plan or necessity to that the size of activities significantly.
This assumption specifies the use of the same accounting policies for similar accounting transactions in all accounting periods. Such a method makes financial results simpler to analyze. Accounting policies may be modified by a statue or accounting standard when a change is required given the need for more appropriate financial statements.
Accrual Basis of Accounting
As the most logical approach to the determination of profit, the accrual basis of accounting is the assumption that transactions are recognized immediately after they have occurred. Accrual basis ensures a better match between revenue and cost. More notably, profit / loss on this basis represents the operations of the organization over the accounting cycle, as opposed to the cash flow method, however cash flows are produced.
Qualitative characteristics enhance the usefulness of the information provided in a financial statement. These are the valued characteristics that a financial statement must follow to:
- Understandability – The analysis of the financial report must be clear and descriptive, to the degree that an individual of sound business experience may understand it. Too much detail, particularly meaningless ones, makes a statement sloppy. However, the non-disclosure of sensitive details can be stopped.
- Relevance – The financial statements will only disclose the details that affect the economic decisions of consumers. Information of this kind may assist the user in evaluating past, present and future events or, on the other hand, in confirming or correcting past assessments.
- Reliability – The information provided must be reliable, and for information to be reliable, it must be accurate and free of errors, bias etc. The following are the traits of reliability:
- Transactions and events reported are faithfully represented.
- Transactions and events are reported based on their substance and economic reality, and not on the basis of legal form.
- The reporting of transactions and events are neutral i.e. without any prejudice or bias.
- Prudence exercised in reporting the uncertain outcome of a transaction or events.
The comparison of statements is one of the most frequently used and most powerful tools for financial analysis. The financial statements must allow for both inter-firm and intra-firm comparisons.
True and Fair View
A financial statement always has to represent a true and fair view of an enterprise’s performance, financial position and cash flow. The application of other qualitative characteristics, combined with the use of sound accounting standards, will help to provide a true and fair view, much in competition with the common view that today’s results are based on yesterday’s actions.
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