Financial reporting – what it is and what standards it has

The primary purpose of financial statements is to provide information about the financial condition, results of operations and changes in the financial position of the company. The statements should contain information about the company’s assets and liabilities, the results of operations, events and circumstances that change assets and liabilities

What are financial statements

Financial statements – a set of accounting indicators reflected in the form of certain tables and characterizing the movement of property, liabilities and financial position of the company for the reporting period. Financial statements are a system of data on the financial position of the company, financial results of its activities and changes in its financial position and are prepared on the basis of accounting data. Owners and managers need financial reports to make important business decisions that affect the future operations of the company. Financial analysis is then performed on these reports to give management a more detailed view of the numbers. 

Types of financial statements

There are four main types of financial statements:

  • the balance sheet groups a company’s assets and liabilities in monetary terms;
  • the income statement contains data on income, expenses and financial results on an accrual basis from the beginning of the year to the reporting date;
  • the statement of changes in capital discloses information on the movement of authorized capital, reserve capital, additional capital, as well as information on changes in the amount of retained earnings (uncovered loss) of the organization;
  • the statement of cash flows shows the difference between cash inflows and outflows for a given reporting period. 

Reporting principles

  • Principle of objectivity. Financial statements should reflect the real state of affairs in the company. 
  • Accrual basis of accounting. To record transactions, not only transactions involving money are recorded, but also barter, credit sales, asset exchanges, and others. All transactions with a potential monetary value are recorded, but the fact that money is paid is not required. 
  • Compliance principle. To account for the company’s operations, deferred costs must be capitalized and transferred to costs as economic benefits are realized. Expenditure for which the benefit has already been received and payment will be made in the future should be recognized as a liability. 
  • Principle of conservatism. It is necessary to minimize the risk of including overly optimistic information in the financial statements. It must be carefully justified. 
  • Principle of reasonableness. Excessive accounting detail should be avoided. 

Standards and regulation

Accounting reports are governed by national and international standards. 

National standards regulate accounting reporting in individual countries: for example, US GAAP in the USA and UK GAAP in the UK. 

Due to the globalization of the world economy, International Financial Reporting Standards (IFRS), which are in force, for example, in the European Union and developed by the International Accounting Standards Board (IASB), are becoming increasingly important. 

Knowledge of accounting practices combined with constant monitoring of the changing legal framework ensures correct preparation of accounting statements, setting up and maintaining accounting, which translates into reduced costs of maintaining the accounting department, protection from penalties from the tax authorities, and ultimately in the growth of business efficiency.