Financial statements

Double entry bookkeeping is used to record transactions in systems designed to allow the management of the business to monitor its progress and produce periodic financial statements and performance reports. The information recorded in the book-keeping system (ledger records) is analysed and summarised periodically (typically each year) and the summarised information is presented in financial statements. Typically these might include:

• a statement of financial position; and
• a statement of comprehensive income

The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. The information explains the financial position of an entity at the end of a period (usually a year) and the financial performance of the entity over that period. Financial statements relate to a given period of time, known as the ‘financial year’, ‘accounting period’ or ‘reporting period’. They are prepared from information held in the financial accounting records (the books, ledgers of accounts), although some adjustments and additions are required to complete the financial statements, especially for companies.
The financial statements are often referred to as a set of accounts of the business.

The business entity concept

Financial reports are constructed as if the business entity is separate from its owners. In other words, the business entity and its owners are different. This is known as the business entity concept.
This concept has legal ‘reality’ in the case of companies. A company by law is a legal person, separate from its owners (the shareholders). However, the concept is also applied to sole traders and partnerships.
Illustration:
Imran Khan sets up a sole trader business as a builder, and he calls the business
‘IK Builders’.
Legally, IK Builders does not have a separate legal personality. The debts of IK
Builders are debts of Imran Khan.
However, for the purpose of financial reporting, the business is accounted for as an
entity separate from Imran Khan.

Responsibility for preparing financial statements

Responsibility for preparing financial statements

 Financial reporting by sole traders and partnerships

The financial statements of a sole trader are private and do not have to be disclosed, except to the tax authorities (and possibly also to a lending bank). These must be prepared according to accepted accounting principles and practice, but need not conform to all the requirements of accounting standards.
Similarly, the financial statements of a business partnership are private and do not have to be disclosed.

Financial reporting by companies

The financial statements of a company are prepared for the shareholders of the company and are usually subject to audit. Audit is the examination of the financial statements by an independent expert who expresses an opinion as to whether they are fairly presented (show a true and fair view).
Company law requires that financial statements are filed with a government agency, where they can be accessed and read by any member of the general
public.Companies whose shares are traded on a major stock market make their financial statements generally available to the public, often on the company’s web site.
The financial statements of a company are subject to more regulation than those of a sole trader or a partnership.

Read Also: INTRODUCTION TO FINANCIAL ACCOUNTING