Definition of Financial Statements, along with the Types and Benefits!

Definition of Financial Statements, along with the Types and Benefits!

The definition of financial statements is a written record by conveying the business activities and financial performance of the company during a certain period. Financial reports are used by accountants, government agencies, firms, and others, to ensure the accuracy of taxes, financing, or investments.

Financial statements must be made as accurate as possible and even must include evidence as a responsibility that there is a transaction. It aims to determine the financial condition of the company. In addition, the company will also know the profits, losses, and tax payments on the financial statements.

Evaluation of financial statements is usually carried out at the end of each company’s period. This activity is important so that you can know the business is going well or down. If it goes up, you have to keep it up and develop it, and if it’s the other way around you have to make a strategy so that it can be stable and the business goes up.

Understanding Financial Statements According to Experts

There is an understanding of financial statements put forward by experts in Indonesia regarding financial statements. Here are 5 summaries that we can quote from several sources:

1. According to SAK (Financial Accounting Standards)

Financial Accounting Standards state that financial statements are a reporting process that includes balance sheets, profit and loss statements, and statements of changes in financial position which are presented in various ways such as notes, cash flows, and other reports that are an integral part of financial statements.

2. According to Harnanto (2002:31)

According to Hartono, financial statements are the final result of the accounting process. Consists of 2 main reports, namely the balance sheet and the income statement. Having a complementary nature, such as the statement of retained earnings on the source and use of funds.

3. According to Machfoedz and Mahmudi (2008:1.18)

According to Machfoedz and Mahmudi (2008:1.18) financial statements are the final result of the accounting process. The report starts from the proof of the transaction, after that it will be recorded in a diary called a journal. Furthermore, periodically the journals are grouped into ledgers according to the transactions.

4. According to the Indonesian Accounting Association

The definition of financial statements according to the Indonesian Accounting Association is a structure that presents the financial position and financial performance of the entity. The general purpose of financial statements is for the public interest, in the form of presenting information about the financial position, performance, and cash flows of the entity, which is useful in providing economic decisions for users.

5. According to Sundjaja and Barlian

According to Sundjaja and Barlian, financial reports that present the results of the accounting process are used as a communication tool by several parties. This person is the person who manages and has an interest in financial data and company activities.

The Definition of Financial Statements and Its Types for Companies

Every company and business venture must have financial statements. In general, there are five types of financial statements prepared by one entity monthly, quarterly, annually or period required by management. The five types of financial statements include income statements, cash flow statements, changes in capital reports, balance reports and notes to financial statements.

This is the meaning of the five types of reports:

1. Income Statement

This report states the financial performance of an organization for the entire reporting period. It starts with sales, and then subtracts all expenses incurred during the period to get a net profit or loss.

The earnings per share figure is added if the financial statements are issued by a public company. It is considered the most important financial report, because it describes performance. There are two types of income statements, namely:

  • Single step income statement: This means 1 income category and 1 expense category. Usually this report is used for startups or SMEs.
  • Multiple step income statement: This report is required by the accountant to separate the expense account into another account which is of course more relevant and detailed that can be used based on its function. These financial statements are usually used in large companies.

2. Cash Flow Statement

The cash flow statement states the cash inflows and outflows experienced by the company during the reporting period. This cash flow is broken down into three classifications, namely cash investment, cash income, and the amount of cash issued by the company. This document may be difficult to assemble, and is more often issued only to outsiders.

3. Capital Change Report

The statement of changes in capital or so-called equity aims to document the increase or decrease in all changes in equity during the reporting period. The changes are the issuance or purchase of shares, dividends issued, and profit or loss.

These record documents are usually not included when financial statements are issued internally, because the information in them is not very useful to the management team. Changes in capital are actually not considered bad, companies also need to require changes in capital to keep operating. As long as the reasons are strong and clear, surely the decision is good for the company.

4. Financial Balance Report

The balance sheet report shows three main things, namely assets, liabilities, and equity. With the balance sheet report it will look at the business interests and analyze the overall financial position of the company and its ability to pay for its operating needs.

5. Notes to Financial Statements

This report provides additional information relating to the company’s operations and financial position which is considered an integral part of the financial statements. Although not mandatory, the notes to these financial statements will clarify certain parties who often reveal financial problems in a business or company.

Benefits of Financial Statements You Must Know!

After discussing the meaning of financial statements and their types, it’s good to discuss what are the benefits other than for entrepreneurs or businesses. There are several parties who benefit from financial statements.

The first party is the management of the company, he is the most important person who has the right to know the financial statements. That way, the management can ensure that all processes of activities related to finance have been running well. Management will also support future business planning.

The second party is an investor, for example, you are an investor in a company. Then you have the right to know whether the capital provided by the company has been used properly. So you and other investors will feel confident in the business.

Third parties, namely creditors, as parties who provide loans to support your business. Financial statements are useful for stating information about the company’s financial condition as a consideration for creditors to refuse or approve loans.

The last party who must know the company’s financial statements is the government. The obligation to pay taxes is something that must be paid in accordance with the numbers written on the entrepreneur’s report. The earlier you make a report, the more your company will avoid unwanted things such as tax evasion.

The Closing

This is the meaning of financial statements, the types and benefits that we can convey. If you want to run good financial management so that your business can run smoothly, then it would be better if you use SAP Business One and you don’t have to worry because SAP software has been proven to help many large companies’ businesses.
Hope it is useful!

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