Every business firm wants to know its financial position at the end of an accounting period. In order to assess its financial position, profit earned or loss incurred during an accounting period, the book value of its assets and liabilities is to be ascertained. In order to serve this purpose, financial statements are prepared. Financial statements are the statements showing profitability and financial position of a business at the end of the year.
It includes:
Income statements: Trading and profit and loss account, which represents direct and indirect expenses, incurred to generate revenues. On one hand, trading account discloses either gross profit or gross loss; on the other hand, profit and loss account discloses either net profit or net loss.
Statement of financial position: Balance Sheet, which enlists the book value of all the assets and liabilities of the firm. Balance sheet discloses the true financial position, solvency and credit worthiness of the business.
