Explain the nature of the financial statements.
The financial statements are the end-products of the accounting
process. The financial statements not only reveal the true
financial position of the company but also help various
accounting users in decision making and policy designing process.
The nature of the financial statements depends upon the following
aspects like recorded facts, conventions, concepts, and personal
1. Recorded facts- The items recorded in the
financial statements reflect their original cost i.e. the cost at
which they were acquired. Consequently, financial statements do
not reveal the current market price of the items. Further,
financial statements fail to capture the inflation effects.
2. Conventions- The preparation of financial
statements is based on some accounting conventions like, Prudence
Convention, Materiality Convention, Matching Concept, etc. The
adherence to such accounting conventions makes financial
statements easy to understand, comparable and reflects the true
and fair financial position of the company.
3. Accounting Assumptions
- These basic
accounting assumptions like Going Concern Concept, Money
Measurement Concept, Realisation Concept, etc are called as
postulates. While preparing financial statements, certain
postulates are adhered to. The nature of these postulates is
reflected in the nature of the financial statements.
4. Personal Judgments- Personal value judgments
play an important role in deciding the nature of the financial
statements. Different judgments are attached to different
practices of recording transactions in the financial statements.
For example, recording stock either at market value or at the
cost requires value judgment. Similarly, provision on various
assets, method of charging depreciation, period related to
writing off intangible assets depends on personal judgment. Thus,
personal judgments determine the nature of the financial
statements to a great extent.
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