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:-
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.
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.
Brief:- the financial statements should be prepared in brief so that it is easy for the user to understand the facts and figures correctly.
Attractive:- It is good to underline and bold the important information in the financial statements to easily attractable to the user.
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.
Analytical Representation:- Analytical representation of financial statements is very helpful in analysis and interpretation of data.