The Financial Reporting System

Objective of financial reporting

The main objective is to provide financial information about the reporting entity to users of the financial statements that is useful in making decisions about providing resources to the entity, as well as other financial decisions. That financial information includes a summary of the transactions of the business of a period of time, usually twelve months.

In order to effectively report that information the the users a system must be established that can capture data about the relevant transactions and events that occur during the financial year, summarise them appropriately and present them in a format that the users are capable of understanding. This is the financial reporting system.

The system is also used to monitor the effectiveness of the business and to help conclude relevant transactions (for example; many goods/services are sold on credit, giving the customer a number of days/months to settle their debt. Credit control requires information from the accounting system with regard to who has not settled their debts and, for that reason, who needs to be chased for payment).

The information flow

The flow of information from the initial transaction to the financial statements is illustrated as follows:

• data is received about the transaction or event,
• the transaction or event is recorded in a book of prime entry,
• the summary totals from the books of prime entry are posted in the ledger accounts,
• the ledger account balances are summarised in a trial balance, and
• the trial balance totals are transferred to the financial statements.

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Tags:	books of prime entry;ledger accounts;the trial balance;financial statements