đź’ˇ Financial statements are written records that convey the business activities and the financial performance of a company during a selected period (From Date - Till Date)
Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.
Their presentation is impacted by several factors:
Foreign exchange gain and lossesLocal accounting principlesBalance sheet
The balance sheet is a report that summarises all of an entity's assets, liabilities, and equity for a selected period. It is typically used by lenders, investors, and creditors to estimate the liquidity of a business. The balance sheet is one of the documents included in an entity's financial statements.
Typical line items included in the balance sheet (by general category) are:
- Assets: Cash, marketable securities, prepaid expenses, accounts receivable, inventory, and fixed assets
- Liabilities: Accounts payable, accrued liabilities, taxes payable, short-term debt, and long-term debt
- Shareholders' equity: Stock, retained earnings, and treasury stock
The exact set of line items included in a balance sheet will depend upon the types of business transactions with which an organization is involved. Usually, the line items used for the balance sheets of companies located in the same industry will be similar, since they all deal with the same types of transactions. The line items are presented in their order of liquidity, which means that the assets most easily convertible into cash are listed first, and those liabilities due for settlement soonest are listed first.The total amount of assets listed on the balance sheet should always equal the total of all liabilities and equity accounts listed on the balance sheet (also known as the accounting equation).
Profit and loss
The income statement presents the financial results of a business for a stated period of time. The statement quantifies the amount of revenue generated and expenses incurred by an organization during a reporting period, as well as any resulting net profit or loss. The income statement is an essential part of the
financial statements that an organization releases. The other parts of the financial statements are the
balance sheet  and statement of cash flows.
There is no required template in the accounting standards for how the income statement is to be presented. Instead, common usage dictates several possible formats, which typically include some or all of the following line items:
- Revenue
- Tax expense
- Post-tax profit or loss for discontinued operations and for the disposal of these operations
- Profit or loss
- Other comprehensive income, subdivided into each component thereof
- Total comprehensive income
When presenting information in the income statement, the focus should be on providing information in a manner that maximises information relevance to the reader.
Trial balance
The trial balance is a report run for an accounting period, listing the ending balance in each account.
The report is primarily used to ensure that the total of all debits equals the total of all credits, which means that there are no unbalanced journal entries in the accounting system  that would make it impossible to generate accurate financial statements.
The year-end trial balance is typically asked for by auditors when they begin an audit, so that they can transfer the account balances on the report into their auditing software; they may ask for an electronic version, which they can more easily copy into their software.
Even when the debit and credit totals stated on the trial balance equal each other, it does not mean that there are no errors in the accounts listed in the trial balance. For example, a debit could have been entered in the wrong account, which means that the debit total is correct, though one underlying account balance is too low and another balance is too high. For example, an accountant records a $100 supplier invoice with a debit to supplies expense and a $100 credit to the accounts payable liability account. The debit should have been to the utilities expense account, but the trial balance will still show that the total amount of debits equals the total number of credits.
The trial balance can also be used to manually compile financial statements
Statement of account
The Statement of Account Report is a financial document that provides a comprehensive overview of the outstanding payments owed to or owed for a company by its customers or clients.
It serves as a valuable tool for monitoring and managing the company's cash flow and credit risk.This report typically consists of two main sections:
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Transaction details
- This section lists each individual transaction or invoice, along with relevant information such as the customer's name, invoice date, invoice number, and the original amount due.
- It provides a clear record of all the outstanding payments that the company is owed.
Aging buckets
- The aging buckets categorise the outstanding amounts based on the length of time they have been overdue.
- Common aging periods include Current (not yet due), 30 days, 60 days, 90 days, and over 90 days past due.
- This categorisation helps identify potential credit risks and facilitates collection efforts.
The Statement of Account Report serves several important purposes:
- It allows you to monitor the payment behavior of individual customers and identify any potential collection issues
- It allows you to monitor how you pay your individual vendors.
- It helps you prioritise collection efforts by focusing on the oldest outstanding balances first.
- It provides valuable information for evaluating credit policies and making informed decisions about extending credit to customers.
- It assists in forecasting cash flow by providing an estimate of the expected cash inflows from outstanding receivables.
- It aids in the calculation of bad debt reserves or allowances for uncollectible accounts.
Overall, the Account Receivable Detail Report is a crucial tool for effective accounts receivable and account payable management, cash flow planning, and risk mitigation within a company's financial operations.
Account detail
The Account Detail Report is a financial document that provides a comprehensive breakdown of all the transactions recorded in a specific general ledger account or accounts receivable/payable account over a given period.
This report typically includes the following information:
- Account Name and Number: Identifies the specific account for which the transactions are being reported.
- Transaction Date: The date when each transaction was recorded.
- Transaction Description: A brief explanation of the nature of each transaction.
- Reference Number: Any relevant reference numbers associated with the transaction, such as invoice numbers or check numbers.
- Debit and Credit Amounts: The individual debit and credit amounts for each transaction.
- Running Balance: The current account balance after each transaction, providing a clear view of how the balance changes over time.
The Account Detail Report serves several important purposes:
- It provides a detailed audit trail for all transactions recorded in the selected account, ensuring transparency and accountability.
- It helps identify and investigate any errors or discrepancies in the account by allowing a line-by-line review of each transaction.
- It facilitates reconciliation processes by providing a complete breakdown of the account's activity.
- It aids in financial analysis by providing insights into the flow of funds and the drivers behind changes in account balances.
- It supports budgeting and forecasting by providing historical data on account activity patterns.
Overall, the Account Detail Report is an essential tool for maintaining accurate financial records, ensuring compliance with accounting standards, and supporting informed decision-making within an organisation.
Aged receivables
The Aged Receivables Report is a financial document that provides an overview of a company's outstanding accounts receivable balances. It serves as a valuable tool for monitoring and managing the company's credit risk and cash flow.
This report typically consists of two main sections:
Account receivable totals by customer or account:
- This section lists the total outstanding balance owed by each customer or account.
- It provides a quick snapshot of the company's exposure to each debtor.
Aging bucket summary
- The aging bucket summary categorises the total outstanding accounts receivable balances based on the length of time they have been overdue.
- Common aging periods include Current (not yet due), 30 days, 60 days, 90 days, and over 90 days past due.
- This categorisation helps identify potential credit risks and facilitates collection efforts.
The Aged Receivables Report serves several important purposes:
- It provides a high-level overview of the company's total accounts receivable balance and its distribution across customers or accounts.
- It helps identify potential collection issues by highlighting customers or accounts with significant past-due balances.
- It assists in evaluating credit policies and making informed decisions about extending credit to customers.
- It supports cash flow forecasting by providing an estimate of the expected cash inflows from outstanding receivables.
- It aids in the calculation of bad debt reserves or allowances for uncollectible accounts.
Overall, the Aged Receivables Report is a crucial tool for effective accounts receivable management, credit risk assessment, and cash flow planning within a company's financial operations.
Account payables
The Aged Payables Report is a financial document that provides an overview of a company's outstanding accounts payable balances. It serves as a valuable tool for managing the company's cash flow and payment obligations.
This report typically consists of two main sections:
Account payable totals by vendor or account
- This section lists the total outstanding balance owed to each vendor or account.
- It provides a quick snapshot of the company's payment obligations to each creditor.
Aging bucket summary
- The aging bucket summary categorises the total outstanding accounts receivable balances based on the length of time they have been overdue.
- Common aging periods include Current (not yet due), 30 days, 60 days, 90 days, and over 90 days past due.
- This categorisation helps identify potential credit risks and facilitates collection efforts.
The Aged Payables Report serves several important purposes:
- It provides a high-level overview of the company's total accounts payable balance and its distribution across vendors or accounts.
- It helps identify potential payment issues by highlighting vendors or accounts with significant past-due balances.
- It assists in negotiating payment terms and discounts with vendors.
- It supports cash flow forecasting by providing an estimate of the expected cash outflows for outstanding payables.
- It aids in the management of working capital and the prioritization of payment obligations.
Overall, the Aged Payables Report is a crucial tool for effective accounts payable management, cash flow planning, and vendor relationship management within a company's financial operations.
Foreign exchange gain and losses
Foreign exchange rates refer to the relative value of one currency compared to another. These rates fluctuate constantly due to various economic factors. When a company conducts business across borders, it must convert foreign currency amounts into its functional currency (the currency it uses for reporting purposes).
The impact of exchange rates can be seen in different areas of the financial statements:
Revenues and expenses
- Sales or expenses denominated in foreign currencies may increase or decrease in value when translated into the functional currency, affecting the reported revenue and expense figures.
Assets and liabilities
- Assets (such as cash, accounts receivable) and liabilities (such as accounts payable) denominated in foreign currencies will also be affected by exchange rate movements when translated into the functional currency.
Foreign currency translation
- For subsidiaries operating in different countries, their financial statements must be translated into the parent company's functional currency. Exchange rate fluctuations can lead to translation gains or losses, impacting the consolidated financial statements.
Cash flows
- Exchange rate changes can affect the reported cash flows from operating, investing, and financing activities when transactions involve foreign currencies.
Overall, exchange rate movements can create volatility in a company's reported financial results, making it challenging to compare performance across periods. Companies often use hedging strategies or disclose the impact of exchange rates to help stakeholders better understand the underlying business performance.
Local accounting principles
When companies operate in different countries, they may need to follow different accounting principles and standards that are specific to those regions or localities. These local accounting principles can have a significant impact on how financial statements are prepared and presented.
Local accounting principles refer to the rules, guidelines, and regulations that govern how financial transactions and events are recorded, measured, and reported in a particular country or jurisdiction. These principles can vary significantly from one region to another, leading to differences in the way financial statements are prepared.
Some of the key areas where local accounting principles can impact financial statements include:
- Revenue recognition: Different regions may have different rules for when and how revenue can be recognised, affecting the timing and amount of reported revenue.
- Asset valuation: Local principles may dictate different methods for valuing assets like property, plant, and equipment, or inventories, leading to variations in the reported asset values.
- Depreciation and amortisation: The acceptable methods and rates for calculating depreciation and amortisation of assets can differ across regions, impacting reported expenses and asset values.
- Provisions and contingencies: The criteria for recognising provisions and contingencies, such as legal liabilities or warranties, may vary based on local accounting principles.
- Financial instrument classification: The treatment and classification of financial instruments, such as investments or derivatives, can be subject to different rules in different regions.
These differences in local accounting principles can make it challenging to compare financial statements across companies operating in different countries. As a result, companies often provide reconciliations or disclosures to explain the impact of local accounting principles on their reported financial results.
