7 Meaning of Financial Statements- Need or Importance and Limitations of Financial statements.

Financial Statements

Financial statements are those statement which includes the income statement, balance sheets, statement of retained earnings and the statement of sources and uses of funds. The income statement includes the trading account and the profit & loss account of the business concern and the balance sheet includes the assets and liabilities of the business.

The financial statement provides the vital information relating to the profitability, liquidity and solvency of the business.  The main aim of the financial statement is to provide reliable information relating to the economic resources, business obligations, changes in net resources etc.

Need or Importance of Financial Statements.

The need or importance of financial statement is to satisfy the needs of the users of the financial statements and which provides relevant information's about the business to the interested parties like Government, management, creditors, share holders etc. The importance of Financial statements are as follows:-

1.      Importance to Management

In the competitive business environment, it is difficult to sustain the business without any advanced planning or forecasting. The financial statements helps the management to know about the current position of the business as up to date, accurate and systematic information relating to the business. It enables the management to identify the current position, progress of the business and the business prospectus which leads the managers to take necessary remedies and plans to develop the business environment.

2.      Importance to Share holders.

In the case of companies, management is separated from the ownership of the organisation and the share holders are not authorized to take part in the day to day business activities of the concern. But in the Annual General Meeting, the results and activities of the concern will be reported to the shareholders in the form of financial statements. This financial statements enables the shareholders to know about the performance of the management and it will give the relevant information of the effectiveness, efficiency and the current financial position of the business also.

3.      Importance to Leaders or Creditors

The financial statements provides the useful information or guide to the suppliers or the creditors of the company. This is done with the help of critical evaluation of the financial statements and which provides the clear idea about the liquidity, profitability and the solvency of the business enterprises.

4.      Importance to Labour

The financial statement provides the profit and loss account of the business. This enables the staff to identify the profit condition of the business and helps to negotiate for the better salary because the profit of the company depends on the salary for the staffs.

5.      Importance to the public

Every business is a social entity which includes the co- operation of the various groups which includes lawyers, trade unions, financial analysts, teachers, research scholars etc. These groups are intended to know the financial position of the business and this will be available only through the financial statements.

6.      Importance to National Economy

The economic development of a country is highly depends on the growth and development of business environment. Financial statement discloses the relevant details of the business to the needy and this is importance to the tax authorities and other statutory aspects in the country.

These all are the importance of the Financial Statements of a business organization.

Limitations of Financial Statements.

The important limitations of financial statements are as follows:-

1.      In formations provided through the financial statements will be incomplete and inexact.

2.      The qualitative information may be ignored in the financial statements.

3.      Financial statements provides historical data.

4.      The financial statements are based on the accounting concepts and conventions.

5.      Personal judgments will be affected to the financial statements.

These all are the important unavoidable limitations of the financial statements.