Nature of Financial Statements

Every business organization maintains the proper record of all its transactions during the year in order to keep proper track of its expenses and incomes. At the end of an accounting year, these organizations measure their business performance in terms of profits or losses. Apart from profits or losses, it is also interested in knowing the actual position of its assets and liabilities at the end of an accounting period. Thus, the records maintained by the organizations to ascertain the profits and losses and to assess the financial position of a firm on a particular date are referred to as Financial Statements. The accounting Process ends with the preparation of Financial Statements. Let’s talk about the Nature of Financial Statements


Nature of Financial Statements


The nature of Financial Statements depends upon the following aspects.

Recorded Facts: Financial statements contains only those facts and data that are recorded in the accounting books and the data that is not recorded in the accounting books is excluded (irrespective of whether such facts are significant or not).

Conventions: The preparation of financial statements is based on some accounting conventions such as Prudence Convention, Materiality Convention, Matching Concept, etc. The adherence to such accounting conventions makes financial statements easy to understand, comparable, and reflect the true and fair financial position of an organization.

Accounting Assumptions: The basic accounting assumptions such as Going Concern Assumption, Consistency Assumption, and Accrual Assumption, etc., are known as postulates. While preparing the statements such postulates are adhered to. Therefore, the nature of these postulates is reflected in the nature of the financial statements.

Personal Judgement: Personal value judgment plays an important role in deciding the nature of financial statements. Different judgments are attached to different practices of recording transactions in financial statements. For example, the method of charging depreciation requires personal value judgment (i.e. it entirely depends on the concerned accountant). Some accountants may use the written-down value method of depreciation, while, some may use the original cost method. Similarly, provision on various assets, a period chosen to write-off intangible assets, etc. depend on personal judgment. Thus, personal judgment determines the nature of the financial statements to a great extent.


Also, Read

What is Revenue Income?

Revenue Income: Revenue incomes are those incomes that are earned in the conduct of ordinary and day-to-day business activities.

What is Capital Income?

Capital incomes are those incomes that do not arise in the normal course of business operations. Such incomes arise from the capital itself, without involving any production work. For example, the premium received from the issue of shares or debentures.

What is Capital Loss?

The capital loss is made good or settled against the capital profits. In case the amount of capital losses is more than the capital profit, then the excess amount is shown on the Assets side