FINANCIAL STATEMENTS - COMPANIES ACT

 

FINANCIAL STATEMENT OF COMPANIES 

LESSON - 1 

COMPANIES ACT

            According to the section 129 of Companies Act 2013, a company has to prepare its financial statements (balance sheet and profit and loss statement) as per the prescribed format in the Schedule III of Companies Act. The section 2(40) of the companies act prescribes the financial statements of a company should contain the followings :

- Balance Sheet - to show the financial position of the company

- Profit and loss statement - to show the financial performance of the company

- Notes to Accounts - it contains all the details of the transaction items of balance sheet and profit and loss account

- Cash Flow Statements - it shows the inflow and the outflow of cash and its equivalent items

Note : It is very mandatory for the companies to follow the format and procedure prescribed by the Companies Act in preparing their financial statements.

NATURE OF FINANCIAL STATEMENTS

a) Financial statements are recorded on the basis of evidences (vouchers).

b) Accounting principle of Prudence is followed. The concept of Prudence says, it is necessary to record all the expected losses even gains can be ignored, so that the performance shown by the company is minimum, the actual performance can be much better in actual terms.

c) The management decisions of a company is based upon the financial statements prepared by the company.

d) Financial statements are not rigid, the management can select their own suitable accounting policies and methods according to their convenience.

e) Accounting Standards and should be strictly followed while preparing the financial statements.

OBJECTIVES OF FINANCIAL STATEMENTS

a) Financial statements provides all the information of its resources and how it has been utilized.

b) Financial performance and financial position of the company can be measured with the help of financial statements.

c) Financial information can be used to compare with the past performance of the company or with similar companies.

d) The accounting policies and procedures followed by the company can be noticed in their financial statements.

e) The effectiveness of the company's management can be measured using the financial statements.

f) Financial statements shows the true and fair view of the business.

DRAWBACKS OF FINANCIAL STATEMENTS

a) The financial information of the financial statements are old and past in nature, it says the performance in the past not the plans of the future.

b) Financial statements are not completely free from personal judgments, as estimations are done while preparing these statements.

c) The present value (market price) of the asset are not taken in consider in financial statements.

d) Qualitative aspects are not recorded.

e) It difficult for all the stakeholders to get the complete information as per their requirement.

f) Different companies follow different policies and method so sometimes it becomes difficult for the management to compare their performance with such other companies.

BALANCE SHEET 

Balance sheet shows the financial position of the company at a specific period of time. The value of Assets, Liabilities and equity is shown at the end of every financial year in their balance sheet.

PROFIT AND LOSS STATEMENT

            The financial performance of the company can be found by looking at the profit and loss statement of the company for a specific period. If the performance of the company is good the

profit and loss statement will show a good positive result and if its bad the vice versa. The company's performance cannot be judged just by the performance in the profit and loss statement as the statement is only for a particular period of time, the performance changes as time changes.

ANNUAL REPORT

            The company sends its annual performance to its users (stakeholders) for their information. An annual report should contain the followings:

- Financial statements

- Board report - the board of directors of the company will sent their report as accordingly to the section 134 of companies act, 2013, along with a report on corporate governance and a report on management discussion

- The Auditors report

- Notes of accounts - notes of account should have the details of the transaction of balance sheet, profit and loss statement, accounting policies, explanatory notes of transactions, and additional information as per requirement.

STAKEHOLDERS (USERS) OF FINANCIAL STATEMENTS

1) INTERNAL STAKEHOLDERS

- Shareholders : Shareholders are the people who had contributed the capital of the company, so they are interested to know the performance of the business as well.

- Management : In order to take decisions, discussions, increase the performance,

 control etc. the management needs the financial information. Financial information are useful for the internal operations of the company.

- Employees : A high performing company will bring number of benefits for its employees, so the employees are interested to know these financial status of their company.

2) EXTERNAL STAKEHOLDERS

- Banks : The banks are the loan providers so they need to know the performance of the company for further providing loans and for the repayment of the loans already provided.

- Government : Financial statements of the companies in a country helps the government in taxation and framing economic policies.

- SEBI (Security Exchange Board of India) : The main reason of formation of SEBI is to protect the investors of the companies, its the duty of SEBI to keep an eye on the financial performance of the companies for the protection of its investors.

- Investors : The performance of the company attracts more and more investors. The investors will also prefer only positive performing companies for their investment.

- Creditors : Creditors have supplied the company with goods or services. Financial statements provides them guarantee for their payment and guarantee for further supply in future.