Every business carries out many transactions each day, such as buying stock, selling goods, paying rent and receiving money from customers. Financial statements are written reports that organise all of this transaction information into a tidy, easy-to-read summary. They are prepared at the end of an accounting period, usually once a year.
What are financial statements?
Financial statements reveal two important things. First, whether the business earned a profit or suffered a loss during the period. Second, what the business owns (assets) and what it owes (liabilities) on a particular date. This information is summarised from accounting records such as the cash book and ledgers.
- The income statement reports revenue and expenses to work out profit or loss.
- The statement of financial position (balance sheet) shows assets, liabilities and owner's equity.
- The cash flow statement tracks money flowing in and out.
Example
Pak Samad's Grocery keeps sales receipts and expense bills all year. On 31 December, Pak Samad arranges those figures into an income statement showing a net profit of RM18,000 and a statement of financial position listing his assets.
Why they matter
Without financial statements, an owner is only guessing about the state of the business. These reports give a true and fair picture so that decisions rest on facts, not hunches. They are also required by the Inland Revenue Board (LHDN) to calculate tax and by banks when the business applies for a loan.
Remember
Financial statements answer two questions: "Did I make a profit?" and "How much is my business worth now?". They are prepared at the end of the accounting period from accurate records.
Features of good statements
To be useful, financial statements must be accurate, timely and easy to understand. Wrong figures can mislead the owner, while statements prepared too late are no longer useful for making decisions. They are also drawn up in a standard format so that one year can be compared with another. The usual accounting period is one year, but some businesses prepare quarterly statements to monitor performance more often.
In short, financial statements are the end product of the accounting process, translating thousands of transactions into a few clear, valid reports that are useful to many parties.