Nature of financial statements

Any organisation doing the business, whether it is manufacturing activity or trading activity or service activity, is interested in knowing basically two facts the business.
a.    Where the business stands at any given point of time in financial terms?
b.    What is the result of operations carried out by the business orgaisation during specific period?
In order to answer these two questions, the organisation carries out the process of recording various transactions in a defined set of records, technically referred to as “accounting”, which is effectively result into the preparation of what are called as financial statements. These financial statements are basically in two forms.
a.    First financial statement is Balance Sheet. This is the answer to the first question. Where the business stands in financial terms. Balance sheet informs about the various sources used by the organisation to raise the funds which technically result into what are referred to as “liabilities” and the way these sources are used which technically result into the creation of “assets”. Sometimes, balance sheet is also referred to as “statement of sources and application of funds”. Effectively balance sheet is a listing of various assets and liabilities of the organisation at any given point of time. Technically, balance sheet is a position statement in the sense it refers to a particular date. As such, balance sheet is referred to a particular date.
b.    Second financial statement is profitability statement. In technical language, it is referred to as “profit and loss account”. This is the answer to the second question viz, what is the result of operations of the business during the specific period i.e whether the operations have resulted into a profit or loss and by what amount. Technically, profitability statement is a period statement in the sense it refers to a particular period. This may be a month, a quarter, a half year or a year depending upon the organisation and the purpose for which hit is prepared. As such profitability statement is referred to as “profit and loss account for the year ending on -----.

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