Finance holds the backbone of an economy. For economic development and propulsion of a country, finances and taxes are highly essential.
Financial statements are records that contain information about the business activities and financial whereabouts of a business. It is a mandatory duty for all business owners to submit a record of the improvement or decline in the businesses of the year. This also includes financial positions like financial strengths and weaknesses. Financial statements are a crucial aspect in the tax departments as well as they determine the accuracy of the inflow and outflow of cash and help in taxes paid by the company.
Types of financial statements
A business or company will generally have four types of financial statements that include
- The income statement which is a profit/loss statement that determines the profit or loss of a company.
- Balance sheets which provide the overall financial status of a business statement of owners’ or shareholders’ equity, which displays the adjustments in the ownership over a period of time.
- Cash flow statements represent the cash exchange between the company and the outside.
To maintain the accuracy of the finance of a company, the accounts departments submit one or more of this information with the tax department at the end of every financial year, which signify the overall health of the company.
Uses of Financial statements
- They’re used for tracking the company’s growth and plan in the direction of the company’s growth in the future years.
- It is necessary for the tax authorities to quickly gain access to the accounting details of the company or business.
- Financial statements are also essential for the Internal Revenue Service (IRS) to evaluate the taxes on the company.
Taxes in financial statements
Taxes appear in all the significant financial statements like the balance sheets, the cash flow statements and the income tax statements. The deferred income tax, which is a liability due for the future, is section is always included in the balance sheet. This means that a company or a business has already earned the income and will not be paying taxes for that income, until the next tax year.
The sales tax and the use tax are generally available on the balance sheets, noted as the current liabilities. Both these taxes are paid directly to the government, and the amount of tax depends typically on the percentage of sales in that business year. These types of taxes are dependent on the jurisdiction and accumulated over 12 months, but can be paid in 12 months in the form of current liabilities.
Auditing and Legal issues
Sometimes a company or business is subjected to auditing, which is the monitoring of the finance in a company on behalf of tax authority or authorities. During these audits, the financial statements of the company are brought to light, and the information is provided to the tax authorities and the government. It is essential to maintain the fairness and accuracy of the business. During this process, an auditor will gain access to all the financial statements of the company.