6 Importance of preparing Financial Statements

Every business organization maintains the proper record of all its transactions during the year in order to keep proper track of its expenses and incomes. At the end of an accounting year, these organizations measure their business performance in terms of profits or losses. Apart from profits or losses, it is also interested in knowing the actual position of its assets and liabilities at the end of an accounting period. Thus, the records maintained by the organizations to ascertain the profits and losses and to assess the financial position of a firm on a particular date are referred to as Financial Statements. The accounting Process ends with the preparation of Financial Statements. The purpose or Importance of preparing Financial Statements is discussed below


Importance of preparing Financial Statements


The following are the purposes and importance of preparing financial statements.

Determining Profits or Losses: Financial Statements help in finding out the profit earned or loss incurred by a business during an accounting period. This is estimated by preparing the Trading and Profit and Loss Account. With the help of the Trading Account gross profit or loss is determined. By using this gross profit or loss in the Profit and Loss Account the net profit earned or net loss incurred during the year is determined.

Determining the Financial Position: Financial statements exhibit the true financial position of an enterprise for a specific period. This is reflected by the Balance Sheet which records the various assets and liabilities of a firm at its book value.

Enable Comparison: These statements help in comparing the current year’s profits and financial performance with that of the previous years, i.e., intra-firm comparisons. Besides this, it also enables to compare the firm’s own performance with that of the other firms in the same industry, i.e., inter-firm comparisons.

Assessing Solvency and Credit Worthiness: With the help of these statements the solvency, soundness, and creditworthiness of the organizations can be easily determined.

Helps in providing Provisions and Reserves: These statements help to provide various provisions and reserves out of its profits to meet the unforeseen future conditions and to strengthen the financial position of the business.

Provides Information: These statements also provide vital information to facilitate its various users of accounting information in the decision-making process.


Also, Read

What is Revenue Income?

Revenue Income: Revenue incomes are those incomes that are earned in the conduct of ordinary and day-to-day business activities.

What is Capital Income?

Capital incomes are those incomes that do not arise in the normal course of business operations. Such incomes arise from the capital itself, without involving any production work. For example, the premium received from the issue of shares or debentures.

What is Capital Loss?

The capital loss is made good or settled against the capital profits. In case the amount of capital losses is more than the capital profit, then the excess amount is shown on the Assets side