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Definition and Functions of Financial Statements

Edukasistan.com - Hi everyone! For this opportunity, we will discuss the Definition and Functions of Financial Reports for Business. To run a business well, it cannot be done carelessly. Adequate knowledge is needed related to the activities in the business, including financial report issues.

Finance is an important element in business, because it determines whether the business will grow or not. Therefore, to build a business from the beginning, an accountant or someone skilled and experienced in managing business finance is needed.

Unfortunately, not everyone knows the importance of financial reports. Even employees in the finance department often struggle to explain the function of financial reports for the company. As a result, the preparation of these reports often does not meet the applicable standards.

The definition of Financial Statements

Definition and Functions of Financial Statements
Definition and Functions of Financial Statements

According to Wikipedia, a financial report or financial statement is a report containing records of money and transactions that have occurred in a business, including purchase and sale transactions and other transactions that have economic and monetary value. Usually, this report is made for a certain period of time determined by the company's policy, either monthly or annually.

Sometimes companies also use both. Financial reports are made to know the overall financial condition of the company, so that stakeholders and users of accounting information can evaluate and take preventive actions accurately and quickly if the financial condition of the business is problematic or requires change.

Given the importance of financial reports, this report must be accurately, carefully prepared, and require accountability presented to competent people in the field, such as an accountant. The accountant must present the report he has prepared in detail to stakeholders, usually at the annual financial performance evaluation.

From the explanation above, it can be concluded that the definition of a financial report is a report containing financial transaction data of the company for a certain period of time that must be reported and accounted for as an evaluation material for the future development of the business.

Types of Financial Statements

There are five main financial reports in a business. Of these five financial reports, they can be customized according to various transactions that occur in a company.

Because each report has different functions and principles, the person creating the report must be able to distinguish between the creation of financial reports that are appropriate for their intended use.

Here is a complete explanation of the five main financial reports of a company, along with their types and functions:

1. Income Statement

According to Wikipedia, an income statement is a company financial report that is made by a business to find out business expenses and income in detail. The contents of this report are revenue data as well as expenses borne by the company.

Usually, this report is made to explain the company's financial condition at a particular time. Therefore, most reports are completed at the end of the year or the end of the month according to the provisions in the company.

With the income statement, stakeholders can find out the latest financial condition of the company. So that the report can be used as a basis for evaluation for further policy steps.

2. Cash Flow Statement

The cash flow statement, also called the cashflow report, is the second type of financial report. According to Investopedia, a cash flow statement is a financial record that contains information about income and expenditures over a period of time.

This report is very useful when evaluating the company's financial structure (liquidity and solvency) and net assets, and can also be used as an adaptive strategy in response to changing circumstances and opportunities.

The cash flow statement must be prepared by the accountant or finance department, and then handed over to stakeholders for follow-up so that all expenditure and income positions run smoothly.

3. Statement of Changes in Capital

According to the official Wikipedia website, a capital or equity change report is an important type of financial report, especially for public companies. The purpose of its creation is for the company to be able to depict the increase or decrease in net assets (wealth) in a certain period of time according to certain measurement principles.

This financial report will be found in large or public companies because most of them have complex ownership structures in changes to equity accounts in the relevant year.

The purpose of the capital change report is to provide a report on changes in working capital and to provide an overview of investments and funds generated in a period and payment assets.

4. Balance Sheet

A balance sheet or balance sheet is another type of financial report that usually includes some information on the company's asset and liability accounts in one period. The balance sheet is available in two forms: stafel or vertical and skontro or horizontal, as explained by Investopedia.

In essence, the balance sheet is a combination of all financial reports made at a certain time, usually once a year. Its purpose is to determine financial steps in the coming year.

The balance sheet is a very important financial report because it includes information on the company's shareholders, existing creditors, applicable government regulations, and various other policies.

5. Notes to Financial Statements

Notes to financial statements refer to additional information that helps explain how the company achieved its financial report numbers. These notes also help explain deviations or inconsistencies in the year-over-year accounting methodology.

Notes to financial statements are not required, they are only intended to provide clarity to those who need it without placing the information in the statement column. However, the information included in the notes to financial statements is often important because it can reveal fundamental issues related to the company's financial health.

Function of Financial Statements for Business

Financial statements are made for specific purposes. It is clear as a tool for determining management policies related to the company in the following period. The following will explain the functions in more detail:

1. To Assess Business Conditions

All types of financial statements are useful as an assessor of business conditions. If the financial statement shows a lot of loss, it means the company is experiencing a decline. On the other hand, if the financial statement shows a lot of profit data, it means the business is growing.

With this assessment, the company's leadership can determine the attitude related to continuing the business or closing the business due to chronic losses.

2. As an Evaluation Material

Financial statements are needed as evaluation material. Without the report, the evaluation will not be optimal or even seem pointless.

It can be said that all of these reports are evaluation parameters to explain a problem and find its solution. If there is a decline in company performance, the cause of the decline can be determined and the best way to overcome it can be determined.

If this evaluation is carried out optimally, the subsequent policy will be easier. Because the cause of the problem and the best solution have been found. So, it is expected that the evaluation in the next period will solve the problem so that it does not occur again.

3. As a Form of Corporate Responsibility

Financial statements also serve as a form of corporate responsibility, both to investors and to the government related to taxes and others.

If the financial statement is detailed, your company is considered reliable by stakeholders. At least the management inside runs well according to each proportion. Conversely, companies with disorganized financial statements can be considered unreliable and potentially face problems in the future.

Financial statements can be compared to report cards for your business. It contains all data related to the comprehensive financial health of your business so that you can know the financial health of your business well.

All of these reports can also make more mature business planning, because you can improvise based on factual data in the report. That is our discussion about the definition and function of financial statements for business. I hope what I wrote is useful, if there are errors in writing, I apologize and thank you for reading.

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