Why income statement needs in the Organization Business

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By: anonymous
on 26th Apr,2012

It is also known as the profit and loss statement.
Why income statement needs in the Organization Business

Income statements show an overview of company's profits and losses. It is also known as the profit and loss statement. These financial documents show the financial aspects of all the projects and operations which are taking place in the business. Income statements show how much money is going out and how much money is being received, otherwise regarded as the inflow. Income statements show the financial ability of the business to operate in future. These financial statements also show the liquidity of the business. Liquidity refers to the ability to pay back loans in the short term. They are used by businesses to take major financial decisions. There are number of reasons why a business needs to produce their income statements.
Profit and Loss Overview
The very basic function of the income statement is its ability to calculate the total profit or loss over a specific period of time. Income statements show detailed information about which project or operation is causing damage/loss to the business or is making good profit for the business, this is done in terms of numbers. After the main cause of a loss is determined with the help of the income statements, then the business is able to take appropriate actions for the damaged operation. Similarly, with the help of the income statements, businesses are able to come up with ways to increase the activity or operations which are making a good profit for the business.
Attract Shareholder
For public limited companies; these income statements play a large role in attracting shareholders. At the end of every year, a Public limited company, by law, has to issue its income statements to the general public to inform about their profits and losses over the whole year. These financial statements are then assessed by potential shareholders, so they can make the decision of buying the company's shares over the stock exchange or not. These financial statements play a similar role for Private Limited companies. However, Private limited companies have the choice to give access to the company's statement to their chosen potential shareholders.
Loans for Investment
Large or even small businesses normally require large amount of capital to invest in their business in the long run. For this, businesses normally apply for loan through the available banks in their home country or regions. The banks require detailed documentation about every aspect of organization or a business. These documents include detailed financial history of the company. The financial history includes income statements from over the last few years of the organization or a business. The income statements would give banks an idea about how the business has been managing its finances over the last few years. This would also show the banks the net worth of the business to pay back the loan which they are asking for.
The use of income statements is very important, which is why they should always be produced by all types of business and organizations. Income statements allow business or organizations to take critical financial decisions relating to big and small operations.
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