The process of recording financial transactions relevant to a business is termed accounting. The task involves summarizing, analysing, and reporting these transactions to oversight agencies, regulators and tax collection entities. A business uses its accounting records to prepare financial reports called accounting reports that are equivalent to financial statements. The most common forms of accounting reports are – income statements, statements of cash flows, balance sheets and statements of equity change. Reports can be as brief or comprehensive as needed for bespoke reports prepared to deliver a particular purpose such as the profitability of a specific product line.
Whether manufacturing or service, no matter what industry your business belongs to, it has to set up various departments in order to function independently or interdependently towards accomplishing the short-term as well as long-term organisational goals. All these departments might be different from one another but at the end of the day, it’s the accounting & finance department that ties all of them together. The accounting & financial aspects of each and every department are recorded and are reported to various stakeholders – there are two different types of reporting – Management Accounting & Cost Accounting.
All the financial transactions performed over an accounting period are presented in the form of financial statements that further narrow down to a financial report showcasing the overall performance of the organisation. Typically viewed as companies issuing financial statements, financial reporting is the way of communicating the financial information or results of an organization to the concerned people, including stakeholders and creditors. Financial reports are generally used to compare companies that are similar in nature or belong to the same industry.
Overall, the basic purpose of accounting and financial reporting is to provide a summary of an organisation’s operations, financial position, and cash flows which is further used by the management to make big small corporate decisions. UAE follows International Financial Reporting Standards (IFRS) and the IFRS for SMEs Standard. The UAE Commercial Companies Law No 2 of 2015, which came into force on 1 July 2015, mandates all companies to apply international accounting standards and practices when preparing their accounts.
Accounting & Financial Reporting: Significance
Financial reporting is the all-inclusive account of all the business transactions, including expenses and income details. Generated either quarterly or annually, financial reports communicate the financial position of an organisation over a specific period. Prepared to study resource usage, cash flow, business performance and the financial health of the business, financial reports intend to track, analyse and report business income. Business owners and managers have to keep the historical data (presented in the form of financial statements) in front of them for future planning and budgeting. They also need to check the correlation between profitability and cash generated from operations. Not only that but, businesses also need to present the company’s financial status to its investors, creditors, clients, suppliers, and government agencies. In the light of these facts, it’s paramount that the accounting and financial reporting is accomplished by the experts in the field only who not only is capable of presenting the true and fair picture of the business’s financial standing but also of ensuring the financial statements comply with IFRS.
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Financial Reporting: Objectives
Keeping track of business is crucial for any firm to move ahead. Management has to understand its firm’s financial position after a certain period. Usually, after one year, a business stabilises and requires forecasting. And that’s where the financial reports come and assist the management in organisational planning and decision-making. It not only shows a clear picture of the financial position but also directs towards future decision-making. It shows the accounts of the last date is the financial year-end, and with the help of the balance sheet, it shows the balances for future business investments. Revealing information about a company’s revenue, expenses, profitability, and debt, financial statements are essential for an organisation. Let’s take a look at some of the objectives behind the preparation of financial reports below. Financial reports provide the required information:
- On the credit and investment decisions made by the company.
- For assessing the cash flow (securities, income earning, profit and loss decisions for lenders)
- Regarding economic resources that include shareholder claims, claims made by creditors and offer clarity to other financial claims, etc.
- About the financial results, profit & loss information or expenses made during certain periods
- On the liquidity and solvency of the firm with details on how the firm gets the funds required for running the business and how it utilises the funds received. It also explains the lenders about the ways of investing money in the business.
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