What are the Main, Characteristics and Objectives of the Financial Statements and what are they for?

The financial statements are based on the fundamentals of demonstrating a true image of the company and its strengths. To understand what financial statements are, the characteristics and foundations on which they are based are key to fully understanding them. In the next article we will review all the fundamentals of the financial statements.

The principles of a financial statement

The documents derived from the financial statement are those that make a direct link with the company; from here the image and conclusions most faithful to the financial and economic sphere are obtained. Speaking of the principles of a financial statement, according to the General Accounting Plan (PGC) They are distributed as follows:

  • Prudence: You must be very careful with the data that are provided to the company. Collections should not be posted before confirming that they have been made. This means that each movement must be done consciously.
  • Homogeneity: This factor was established to maintain a character of uniformity when doing accounting or doing any task that has an impact on the financial statements. This point is decisive in all internal audits, being a duty.
  • No compensation: As the last principle on the PGC list is no compensation; This maintains that in case of registering a list of expenses or income, there should not be the chance to compensate them, if there is not one. specific rule for it.

How is a financial statement governed?

calculator on pen

All financial statements are generally based on five basic forms of annual accounts. Some of these basic ways are:

  • Provide a balance sheet
  • Have an income statement of the company
  • Shows the changes that the net worth
  • Maintains a cash flow statement
  • And finally, you must have a memory.

A basic annual account serves to see a complete and detailed picture depending on which financial state you want to study. In addition to this, the situation of the company, how the equity or also the flow of operations.

With what objective must fulfill the composition of a financial statement?

The objective of each of the states mentioned above is quite clear, as the role of each must be examined with caution. Below we will mention one by one the objectives to be met by each of the five.

  1. Balance of situation: At first hand, it fulfills the function of giving a quick image of the distribution of assets, liabilities and equity of the company. A good balance sheet results in complete knowledge of the leverage that a company has.
  2. Income statement: The clear objective of this second financial statement is to collect the income that the company has, as well as its expenses. This in order to give know the theoretical net profit that the company should own.
  3. Cash flow statement: On the other hand, its appearance and function is simple and concise. It is in charge of registering the amount, and also of having it written every time that money leaves or enters the company, from any source.

company financial diagram

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  1. State of change in equity: The objective of the fourth statement in the list is to show the evolution that the company’s equity has had during a specific time, determined by it.
  2. Memory: The purpose of the latter in the list is to mention and take into account the details that have been overlooked in the states mentioned above. Its role should not be underestimated, as all details must be recorded.

Characteristics of a good financial condition

Each annual account must have five basic characteristics to be trusted. Next we will briefly mention what your financial status must maintain to be totally reliable.

  • Understandable: All the information presented here must be understandable by shareholders, employees, investors or public institutions.
  • Relevant: The information must be relevant to be in the document, omit the information that does not have any repercussions.
  • Comparable: In order to notice improvements or errors compared to previous times, each report must be able to be comparable to each other.
  • You must feel that you belong to the company: With all the characteristics mentioned, all financial statements will meet expectations of those who will make good use of it.

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