Financial reports will be very important, especially for business people. To fulfill several functions, there are types of financial reports that you need to know about.
Because finance is one of the most crucial points in a business. From finance, operations as well as business development can be implemented.
Therefore, it is necessary to apply the company’s financial statements to make financial reports that are neat and according to the standard rules in making each type.
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Before discussing further about the type, we start from the definition.
Definition of Financial Statements
The financial report is a record of all financial transactions. Where the report is made in a certain period.
The report must be made neatly, systematically and easily understood. Because the function of financial reports is to provide accurate and accountable financial condition information.
The company’s financial statements will assist management in evaluating performance and developing the business.
Therefore, the report must be submitted to a competent person, such as an accountant.
Types of Financial Statements
Financial reports consist of several different types. Where the components of financial statements are different for each type.
This is in accordance with the principles as well as the function of the report itself. Accountants or those responsible for preparing financial reports must understand the differences between these types of financial reports.
The following are the types of financial reports along with a brief explanation.
1. Profit and Loss Report
These financial statements are often referred to as income statements or profit and loss statements. This report is made to show financial performance.
From this income statement , you can identify the condition of the company whether it is profitable or losing in one accounting period.
That’s why this report is often made at the end of a period such as the end of the month or the end of the year according to company policy.
In addition, this financial report also helps determine the company’s tax payable. In addition, it can also be used as a reference for evaluation and decision making.
The components of the income statement financial statements include expenses, revenues, tax expenses, cost of production and company profits.
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Profit and loss financial statements are prepared in two different formats, namely single step and multiple step.
For a simpler single step format. You don’t need to include the company’s cash flow in detail.
Simply use the equation where net income is derived from the total revenue and profits minus the total expenses and losses.
This format of profit and loss statement is very simple and suitable for beginners. Besides being easy to understand, it is also easy to make.
While the multiple step income statement is a little more complicated.
This report separates income and expenses that are directly related to operations, from income and expenses that are not directly related to operations.
This multiple step report uses three equations to generate net income values. The three equations are:
- Calculation of gross profit from the reduction of cost of goods sold by net sales
- Calculation of operating income from the reduction of operating costs by gross profit
- The final result is net profit/loss from the sum of net operating, non-operating income, profits, expenses as well as losses
2. Financial Statements of Cash Flows
Of the types of financial reports that exist, the cash flow financial report is one of the reports that always exists in every type of business, both small and large.
This report serves to provide information related to expenditure and income within a certain period of time.
From this report, you can evaluate the financial structure and net assets of the company. In addition, it also makes it easier for you to make decisions and determine strategies to deal with opportunities and changes.
With a cash flow report, you can monitor and ensure that expense items and income are running properly.
You can make this cash flow report manually with excel, but the results will be better and more accurate if you use technology such as online accounting software.
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The cash flow statement is an example of a simple financial report that is important for every business actor to have.
There are three main components of the cash flow statement, including:
- Operational activities which contain the company’s operational activities such as inventory, sales of goods and services as well as purchases
- Investing activities related to cash flows related to the purchase or sale of fixed assets
- Funding, namely the activity of increasing capital. Where the calculation results are obtained from the reduction or addition of cash from owner’s equity and long-term liabilities
3. Financial Statements of Changes in Capital
This type of financial report, also known as equity, is very important for public enterprises.
Because most large companies have a complex ownership structure on changes in equity accounts in a certain period.
With these financial statements, companies can project the rise and fall of net assets in a certain period according to determined measurement principles.
From there you as well as investors can identify business development through the amount of capital owned. Does it increase or not.
4. Balance Sheet Financial Statements
This financial report is also known as a balance sheet. Generally contains information on assets as well as liabilities of a company in a certain period of time.
So the components of this financial report are asset, capital and liability accounts. From this report, you can see the company’s position and financial information.
The equation used in this report is that assets are the sum of capital and liabilities. Where assets are in asset position, while capital and liabilities are in liabilities.
You have to make sure, the amount on the assets and liabilities side is balanced. If there is a difference, it means that there is an error and a revision must be made at the specified time.
Revision is needed to prevent ambiguity when reading the entire company’s financial statements.
As in the bank reconciliation process , the point is to match the records between the company’s cash and the bank’s to look for discrepancies and, if any, the causes.
This financial report is prioritized among other types of financial reports in the company.
With a balance report, at least you can confirm that the accumulative financial statements match the separate data in the previous report.
5. Notes to Financial Statements
This type of report is made with reference to additional information that is able to explain the origins of the company’s finances to the figures reported.
Also from these records, you can identify any inconsistencies in the account within a certain period.
This type of record is not mandatory, but can help provide clearer and more detailed financial information.
Usually, this report is used for large-scale companies, because it requires more detailed explanation regarding financial reports.
That’s why this type of report is thicker than other types of reports. Placement is also usually at the end of the report because it aims to provide a detailed explanation.
With the notes on this financial report, it will be easier for you to understand the other reports previously presented. Because there is a complete explanation.
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From the explanation above, we know that financial reports consist of five different types according to their principles as well as their functions.
You can take advantage of various types of financial reports to facilitate financial management and efforts in business development.
With this explanation, we hope that you can prepare the types of financial reports properly and correctly as they should.