Financial statements are an essential part of any business. They are the complete representation of your business’s financial health because it concerns the sources of your money, where it is being invested and the remaining money you have. They help in strategizing the future of the organizations and making smart moves. Moreover, financial statements are needed when drawing up legal contracts, making loan applications, reporting on sustainability and while attracting investors.
There are many accounting and audit firms in Malaysia that help businesses, especially large organizations, to prepare a thorough financial statement for complete financial transparency.
It is important to familiarize yourself with different aspects of financial statements. Let’s start with the basics.
What are financial statements?
Financial statements are reports that give details about the finances of an organization. Whether it is a new company or a well-established enterprise, every type of business must maintain financial statements and be familiar with the reading and analysis of these statements. There are three main parts of a financial statement:
- Balance Sheet
- Income Statement
- Cash Flow Statement
In combination, these statements give a complete and clear picture of your organization’s financial health. It will tell you how much money is being invested in a project, the amount of debt owed, monthly income, investment expenses and other important financial details.
1. Balance Sheets
A balance sheet is a summary of your current business finances. It contains information about the assets your organization owns and the liabilities (or debts) you owe at the time of the creation of the balance sheet. The frequency of balance sheet generation varies from business to business, depending on the organization’s requirements, type of company and level. Some businesses prefer to do daily or monthly balance sheets, while some do it only once a year.
A large organization that has to deal with a lot of money on an everyday basis usually prefers to prepare a balance sheet on a daily or weekly basis to prevent corruption, embezzlement and other financial errors. For example, banks prepare a balance sheet every day to keep a comprehensive record of the money. If your organization has hired a competent accounting firm in Malaysia, it will be responsible for looking after the financial statements and documents of your company.
A balance sheet has three main parts:
- Equity (Equity = Assets – Liabilities)
2. Income Statements
An income statement is also called the profit and loss statement of a company. It tells you how profitable your business was over a certain period, such as a month or year. The accounting period depends on the accounting firm you might have hired and the agreement you have with that firm. The income statement is a clear description of how much money you made and how much you spend, meaning it gives information about both revenue and expenses.
3. Diverse Reporting
Not every financial statement needs to fit into a specific type. Instead, there are numerous other types of financial statements being used by different organizations. Experienced investors and audit firms in Malaysia will have no problem in understanding different financial statements. It is also possible that an organization has the same type of financial statement but a different approach to data presentation. It simply means that diverse types of businesses produce diverse presentations of the financial statement. The balance sheet, especially, varies a lot from business to business. Comparatively, income statements and cash flow statements do not vary much.
Importance of Financial Statements
Financial statements allow you to quickly analyze your net income, cash flows and any debt your organization might have. Similarly, a summary of past trends is included in financial statements. Future strategies can be decided on in order to maximize profit and reduce debts based on the collected and analyzed data.
They are an essential tool for optimizing the financial performance of any organization. Investment in various assets is made based on the results of a financial statement. Similarly, the complete financial history of a business is critical in securing a loan. If your company has obtained loans from multiple lenders, they should be mentioned in financial statements.
In a Nutshell
Financial statements are prepared using the collection and comprehensive analysis of financial data. Their importance cannot be denied for various reasons such as maintaining financial history, applying for different loans and complete financial transparency to avoid any legal issues. While small businesses can easily prepare their own financial statements, larger organizations should hire an accounting or audit firm in Malaysia for thorough bookkeeping, preparing financial statements, analyzing them and suggesting future strategies. For more information, feel free to get in touch with us.