What are Accounting Reports?
Accounting Reports are prepared for a specific purpose, like checking the ledger-wise transactions occurred over a period of time. These financial reports are prepared from the accounting data of a business. Accounting reports also include financial statements such as cash flow statements, profit and loss statement and the balance sheet.
Purpose
Let us understand the far-reaching uses of accounting reports with a simple example.
#1 – Every business needs to prepare its financial statements – By recording the everyday financial transactions, essential business decisions take place. Financial statements of a fiscal year are financial reports that throw light on an organisation’s overall health.
- They provide information on the profitability of the day-to-day operations, cash flows and total debt, etc. Accounting reports also talk about the performance of a particular business segment, like the total sales made in a quarter. In other words, such reports bring into notice the financial position of the entity.
- The more accurately and correctly, all the financial data are managed, the more convenient it is for the analyst to understand the company’s position and the changes it requires.
#2 Accounting Reports help with the following –
- Helps in crucial business decisions – Accounting reports are crucial for the management. They often examine different types of financial statements to figure out better ways for maximising profits. It also helps them make critical financial and non-financial decisions like whether to go for capital structuring of debt and equity. An example of an accounting report is that of a bank. Before extending a loan, the lender examines the borrower’s critical financial statements to ascertain whether they will be able to repay the debts or not.
- Short term decisions – An example could be preparing budgets, which an entity arrives at by predicting the revenues or expenditure in advance. This preparation will be impossible without referring to the business data.
- Investor analysis – Investors analyse an entity’s financial model before investing their hard-earned money, which becomes easier with financial reports.
- Compliances Decisions – They assist the entities in calculating the correct amount of due tax, keeping in mind the regulatory guidelines.
- Goodwill/ Capital Reserve – Business acquisitions require an examination of valuation of goodwill or capital reserve which cannot be done without financial reports.
Component
To understand the components, we need to dig deeper into the world of bookkeeping. The recording of financial data or bookkeeping is called accounting. In the beginning, accounting took place in a manual form. But now with the advent of technology, bookkeeping has become a computerised process. The most common types of accounting reports are Cash flow statement, Balance Sheet and Profit & Loss Account/ Income & Expenditure Account.
#1 – Balance Sheet
A Balance Sheet gives us a tabular view of an organisation’s assets and liabilities on a particular date. A balance sheet components are non-current assets, current assets, cash and cash equivalents, non-current liabilities, current liabilities, and share capital.
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#2 – Cash-Flow Statements
A statement that shows inflows and outflows of cash for a set period is a cash flow statement. There are two ways to prepare it. One is a direct method that considers the inflow and outflow from everyday operating activities. The other is an indirect method that records the movement of cash occurring in operating, investing, and financing activity.
#3 – Profit & Loss Account
It is a statement showing all the expenses incurred and all the revenues earned for a particular period.
Some more uses of Accounting Reports
- They give a compiled view of all the financial information. Hence they are time-saving and allow taking the corrective measures.
- If there is no compilation of data, the comparison of current data with that of the previous year will become impossible.
Key Takeaways
- Accounting Reports are prepared for a specific purpose, like checking the ledger-wise transactions occurred over a period of time.
- These financial reports are prepared from the accounting data of a business. Accounting reports also include financial statements such as cash flow statements, profit and loss statement and the balance sheet.
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