NATURE OF
FINANCIAL STATEMENTS
The
financial statements are prepared on the basis of recorded facts. The recorded
facts are those which can be expressed in monetary terms. The statements are
prepared for the particular period generally one year. The following of the
nature of the financial statements are discussed below:-
Recorded Facts:-
The data which is taken out from the accounting records is known as
recorded facts. actual cost data are the source of maintaining the accounting records.
Accounting Conventions:-
Various accounting conventions
such as historical cost convention , Monetary
measurement, Separate Entity, Materiality, Realization, etc are adopted to prepare external
and internal Financial accounts. The accounting
conventions help to make financial statements realistic, comparable and simple.
Personal judgments:-
For preparing financial statements, standard accounting conventions is
very important instead of this One important things plays a very important role
in making financial statements i.e. Personal Judgments. For example, in
applying the cost or market value whichever is less to inventory valuation the
accountant will have to use his judgment in computing the cost in particular
case. There are a number of methods of valuing stock, i.e. First in First out,
last in first out, average cost method, etc. The accountant will use one of
these methods for valuing materials.
Postulates:-
It is very important for an accountant to makes certain
assumptions at the time of preparing accounting records. These postulates are derived
from accounting environment so it does not require any proof. It is assumed
that everyone can understand an accounting postulate so that it is recorded in financial
statements.
CHARACTERISTICS
OF IDEAL FINANCIAL STATEMENTS
The
main purpose of preparing the financial statements is to depict financial
position of the business concern. Therefore, the financial statements should be
prepared in such a way that they are able to give a clear and orderly picture
of concern. The ideal financial statements should have the following
characteristics:-
1] True
Financial Position:- All the information mentioned in the financial
statement must be true and correct so that it is easy to know the financial position
of the business. At the time of preparing these statements, No information
should be withheld.
2] Effective
Presentation:- Presentation plays very important role to make the financial
statement clear to everyone. It is very necessary to present the financial statements in a clear,
simple and logical form so that it can be easily understandable. It is better to avoid using difficult accounting
terminology so a man with less knowledge of accounting can also understand it.
3] Brief:- the financial statements should be
prepared in brief so that it is easy for the user to understand the facts and figures
correctly.
4] Attractive:- It is good to underline and bold the important information in the financial statements to easily
attractable to the user.
5] Comparability:- The financial statement should
be prepared in such a way that the result can be compared to the previous years
statements. It is also in such a way so that it is easy to compare figures with
the other business of same nature.
6] Analytical Representation:- Analytical representation
of financial statements is very helpful in analysis and interpretation of data.
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