Nature of Financial Statements
Nature of Financial
Statements
The information in the Financial Statements is
the result of combination of:
(i) Recorded facts: The term
'recorded facts mean': recording of transactions based on evidences in the
books of account. For example, amounts of cash in hand, cash at bank, debtors,
sales, purchase, etc. are recorded facts.
(ii) Conventions: Accounting
conventions are followed while preparing financial statements. For example,
because of convention of 'conservatism, provision is made for expected losses
but expected profits are ignored. It mean that real financial performance and
financial position of the business may be better than what is shown by the
financial statements. The use of accounting conventions makes financial
statements reliable, understandable and comparable.
(iii) Accounting Concepts: Financial
Statements are prepared by following the accounting concepts. For example,
under the Going Concern Concept, it is assumed that the business shall continue
for a foreseeable future. The use of accounting concepts also makes the
financial statements reliable, understandable and comparable.
(iv) Personal Judgments: Personal
judgments also have an important bearing on financial statements. For example,
the choice of selecting a method of depreciation or selection of the inventory
valuation method also depends on the personal judgment of the management.
(v) Source of Financial Information:
Financial Statements are the source of financial information on the basis of
which conclusions are drawn about the profitability and the financial position
of a company.
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