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Importance of Preparing Financial Statements
Accounting services are important in any business regardless of its size, this is important because the company will have healthy finances when its expenditure and earning are controlled. Accounting is also basic since it makes the organization comply with the set laws and regulations. Financial records are records of the financial related activities of the organization, the short term and long term financial position of the organization is always shown through this financial records.
Financial statements should be prepared by an individual with an education in accounting, they should have the necessary skills and knowledge in the preparation of the financial statements, and this will ensure that they will prepare accurate financial statements that will portray the true and Fairview of the company’s financial performance. financial statements should always be prepared at the right time, they are mostly done at the end of the year.
There are normally four types of financial statements an organization prepares and all have unique purpose but they are somehow related, these are; income statement, statement of financial position, statement of cash flows and statement of owners’ equity. The profit and loss account demonstrates the organization’s profitability amid a particular year; it sums all the income and deducts every one of the costs incurred amid the year. The profit and loss account has four parts these are; sales, cost of sales, gross profit and operating costs.
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The statement of financial position shows all the resources of an entity as well as owners’ equity of a specific period of time, it has key components these are; asset where it shows the current assets and the non-current assets of the entity, there is liability which shows the current and non-current liabilities of the company, and it also has owners’ equity which represents what the stockholders have invested.
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The statement of owners’ equity shows the changes that have occurred in the company retained earnings over a certain period of time. The statement of cash flows shows how changes in the balance sheet and the income statement will affect the cash and cash equivalents.
The financial statements prepared should be reliable and simple to understand for the reader. People from different walks of life will use the financial statements prepared by the organization. The organization will be able to know its financial position when the financial statements are prepared. Stakeholders as well as shareholders will be able to know how the company will be performing when they review the financial statements. An investor will always know if he is going to invest in the company if he looks at the financial statements a company when he is conducting his due diligence.