Financial Statements – Concept, functions and characteristics

We explain what financial statements are and what the functions of these reports are. Also, some of its main features.

financial statements
The financial statements are useful for the administrative group of the entity.

What is financial statements?

The financial statements are reports and documents with economic information, of an individual or entity. Also known by the name of financial statementsThese reports expose the economic situation in which a company is, as well as its variations and evolutions that undergo during a certain period of time.

Financial statements are usually useful for the administrative group of the entity, analysts and third parties who play an investor role for it (shareholders, owners).

In different countries the concept of financial statements takes another name:

  • In Argentina they are known as balance.
  • In Colombia, some financial statements are called Financial Balance.
  • In Spain they receive a totally different name, Annual accounts.

Statement of financial position or balance sheet

Financial statements - Assets - Liabilities - Equity
The asset is made up of the economic assets of a company.

This is a financial report that reveals the economic situation of an entity at a specific time of their life. This element is made up of three concepts widely used in financial statements: assets, liabilities and equity:

  • The active. It is made up of the economic assets of a company, documents with a work date and all kinds of expenses that provide a future benefit to said company; in an accounting balance the asset is within the credit.
  • The passive. It is any debt or commitment that a company acquires for its own financing or for third parties; in an accounting balance the liability is within the debit.
  • The net worth. The PN is the residual resources of the asset, after deducting the liability. The net worth is then calculated using the following equation:

Assets – Liabilities = Equity

Income statement or profit and loss statement

Here it is reflected how was the result of each exercise achieved in a specific time in an orderly and detailed manner.

This document is of vital importance for each company and its realization consists of get expenses and income from specific and separate categories, so that results can be obtained. The result varies if it was achieved before or after taxes.

State of evolution of Equity

financial statements
The evolution of the net worth shows the changes and variations of the company.

This accounting statement is one that provides vital information regarding the size or amount of the Equity that a company owns and its different variations or changes over time. Said variations or changes are consequences of different actions:

  • Transactions made with the owners, third parties or shareholders.
  • The surplus achieved or also positive gains that increase the Net Equity of a company.
  • The deficit or losses that cause an abrupt decrease in the Net Equity of a company

Cash flow statement

This accounting statement is present in all companies and is intended to report the different variations, modifications and cash movements.

The usefulness of the information provided by this financial statement resides in show managers the ability of the company to generate cash or equivalent. Decision-making by users is totally related to the results offered by this accounting statement.