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Preparation of Financial Statements

Financial information is conveyed to users in the form of different reports and schedules. There are different parties who were interested in such reports.

Example

Owners, management, creditors, research, scholars, government authorities, etc.

Generally reports to internally users (management) are specially designed to meet their particular needs. Reports to external users should be more standardized and are often referred to as financial statements.

There are two principal statements which are prepared for business concerns.

A. income statement

B. Balance sheet

The information from the trial balance will be an input for the preparation of financial statements as we are mentioned earlier types of financial statements that each financial statement has its individual identity and purpose but the basic information financial statements derived from the accounting cycle.

The information from the accounting cycle is further refined and presented in the financial statement. The purpose is to show business financial position and financial performance during the period covered by the business.

Income statement shows the result of operation for a period time. Expenses and revenues are matched against each other for the same period and if expenses are less than the revenues there will be net income position. Whereas the balance sheet is called the statement of financial position it clearly shows the financial health of the business. After completing these two statements, the performance in terms of profitability and return on capital employed can be well examined by another technique of accounting called ratio analysis that clearly describes in a relationship form the financial position and performance of the company.