Financial reporting of banking companies is important for several reasons. First, the rapid changes brought out by economic reforms have exposed the Indian financial sector in general and the banking sector in particular to the challenges of global banking business. Second, banking companies in India are also moving towards public participation and are coming up with their Initial Public Offerings (IPOs) and also raising funds through Global Depository Receipts (GDRs) and American Depository Receipts (ADRs) from abroad. Last, unlike other companies, most of the funds used by banks to conduct the business belong to creditors, particularly to depositors.

Accounting is an information system necessitated by the great complexities of modern business. It is a system of generating and communicating financial information to tabulate the operations of an enterprise. Accounting provides useful information about the activities of an entity to various individuals or groups for their use in making informed judgments and decisions.

Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA) defined Accounting "as a service activity and its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions and reasoned choices among alternative courses of action." So the ultimate aim of accounting is to communicate economic message on the results of business decisions and events to the users in such a way to attain maximum understanding on their part. And financial reporting is useless, if it is not an exercise in communication. People in every walk of life are affected by financial reporting, the corner stone on which the process of capital allocation is built. The need for financial reporting has been felt universally. The latest report of Financial Accounting Standards Board (FASB) in the US said that companies should voluntarily disclose more information on the subject of interest to the shareholders.

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