Financial statements reflect a combination of recorded facts accounting conventions and personal judgments. Discuss.
Financial statements reveal the true financial position of a company and help in formulating various decisions and policy making.
The nature of financial statements are dependent on these aspects:
1. Financial statement record facts about the items at the original price at which they were purchased and doesn’t take into account the prevailing market price, and also do not include price fluctuations due to inflation.
2. The financial statements are created based on various accounting conventions such as Prudence convention, matching concept etc. and adhering to such conventions result in the statements being easy to understand, compare and reflect the fair and true financial situation of the organisation.
3. A financial statement is based on many concepts such as going concern concept, realisation concept, and money measurement concept. A financial statement adheres to all these concepts when financial statements are prepared.
4. In preparing financial statements personal judgements play an important role. For example, when determining which method to charge depreciation and recording of stock at market value or cost price. All these are based on personal judgement.
Financial statements reveal the true financial position of a company and help in formulating various decisions and policy making.
The nature of financial statements are dependent on these aspects:
1. Financial statement record facts about the items at the original price at which they were purchased and doesn’t take into account the prevailing market price, and also do not include price fluctuations due to inflation.
2. The financial statements are created based on various accounting conventions such as Prudence convention, matching concept etc. and adhering to such conventions result in the statements being easy to understand, compare and reflect the fair and true financial situation of the organisation.
3. A financial statement is based on many concepts such as going concern concept, realisation concept, and money measurement concept. A financial statement adheres to all these concepts when financial statements are prepared.
4. In preparing financial statements personal judgements play an important role. For example, when determining which method to charge depreciation and recording of stock at market value or cost price. All these are based on personal judgement.
