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objectives-of-financial-statements


Posted Date: 21-Jun-2009  Last Updated:   Category: Education    
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Financial statement prepared to meet the needs of several users are known as general purpose financial statements. Special purpose financial statements are also prepared to meet the requirements of taxation and other regulatory authorities. In this Context we shall discuss the objectives of general purpose financial statement, as the special purpose statement are prepared only to meet the needs of specific users. Even in the case of general purpose statement,initially,these were designed more to serve the needs of owners rather than creditors or potential investors or the employees.
Financial statement prepared to meet the needs of several users are known as general purpose financial statements. Special purpose financial statement are also prepared to meet the requirements of taxation and other regulatory authorities. In this context we shall discuss the objectives of general purpose financial statements,as the special purpose statement are prepared only to meet the needs of specific users. Even in the case of general purpose statement, initially,these were designed more to seve the needs of owners rather than creditors or potential onvestors or the employees. Nowadays,there is a great emphasis on the disclosing more and more information in the financial statements. Although accounting disclosing more information through financial statement,recognizing the legislation in the most of the countries has made in mandatory for enterprises to disclose certain minimum information. The basic Objective of financial statement users particularly owners and creditors in making economic decisions".A part from providing information useful for making economic decisions,the other important Objectives are

To provide on formation about the economic activities of the enterprise to several external groups who otherwise have no access to such information.
To provide useful information to investors and creditors in taking decisions relating to investment and lending.
To provide information to potential investors in evaluating the earning power of the enterprise. All the group who are directly involved in the economic activities of the enterprise are concerned about the ability of the enterprise to operate at a profit Without an adequate level of profits an enterprise cannot survive in the long run. Apart from owners creditors who provide funds, suppliers providing materials and enterprise.The pas and present statement can also be used for predicting the future earning power of an enterprise by using methods of extrapolation and supplementary date
To provide economic information to the owners to judge the management in its stewardship of the enterprise and the achievement of the coperate objectives.
To provide economic information which enables the investors to compare the performance with similar other undertakings and take appropriate decisions regarding retention or dis-investment of their holding. The comparison may be inter-period also.Thus comparability is another important objective of financial statement.
To provide information regarding accounting policies and contingent liabilities of the enterprise,as these have a bearing in predicting, comparing and evaluing the earning power of the enterprise


Nature of Accounting

There is another school of through which feels that the term “principle” means only “rule of action or conduct” and as such can be very correctly used with reference to rule used in accounting. The American Institute of Certified Public Accountings (AICPA) has also supported the use of the word “principle” as “a general law or rule adopted or professed as a guide to action; a settled ground or basis of conduct or practice.” Paton and Littleton, in order to avoid the confusion as to the meaning of the term “principle”. Have purposely used a new term “standards” in place of “principle”. They state, “The term ‘standard’ in a place of ‘principles’ would generally suggest universality and a used advisedly. ‘Principles’ cannot exist in a human services institution such as accounting”.

It is difficult to codify the accounting principles and standards because, unlike the principles of the mathematics, physics and natural sciences, they change and develop with the passage of time due to research carried in the law of nature as are the physical sciences. Therefore, accounting principles or standards must be developed in relation to what we consider to be the key objectives of financial statement. Reaching agreement on the objectives of financial statement has not been an easy task”

Since the principles are meant only as board guidelines, individual companies have latitude in the matter of observing them. This is but natural because all companies are not alike. Therefore, each company has its own method of recording and reporting and such accounting policies to be disclosed.

Essential Features of Accounting Principles

Accounting principles are acceptable when they, in general, satisfy the following three basic norms:

Ø Usefulness,

Ø Objectivity, and

Ø Feasibility.

Accounting principles satisfy the first basic feature of usefulness inasmuch as because of these, the accounting record becomes more meaningful and useful to the reader. In order of the records to its readers, is not accepted as an accounting principle.

Accounting principles is that which objectives in nature. It is said to be objective when it is solidly supported by facts. It is objective when is cannot be influenced by the personal bias and whims.

Accounting principles should be such as are practicable. It will be seen that assets in the accounting are recorded at cost less depreciation as against at market price. This accounting principle is practicable and feasible because it does not entail the difficult work of ascertaining the market price of that asset. It does not make it obligatory for the accounting to record all ups and downs in the price of that asset.

It May be seen that these three features are generally found in the accounting principles. But in some cases an optimum balance of the three is struck for adopting a particular rule as an accounting principle. In some cases even a sacrifice of one in devour of the other is made. For example, the original cost price of the asset, as which it is reported in the published accounts, is not of much use to the reader in that the change in price index makes that figure obsolete, but in favors of the feasibility it has been opted. The more useful figure, the market price of the assets, is not adopted for the preparation of accounts for that is partly not feasible to get and partly less objective in nature

Similarly, the principle of making the provision for doubtful debts is founded on feasibility and usefulness through it is less objectives. Such provisions are not supported by any outside evidence. They are the result of a subjective approach.

Kinds of Accounting Principles.

To distinguish accounting principles from the sense in which the term principles is used in physical science, various other terms like postulates, concepts, conventions, doctrines, tenets axioms, assumption, etc., have been used by writers of accounting theory. Instead of wasting our time to discuss the precise meaning of these generic terms, we should concern ourselves with the significance and importance of these ideas in the practical work of the accountants. However, a slight distinction is made between the two terms ‘concepts’ and ‘conventions’. The term “concept” is used to connote the accounting postulates, that is necessary assumption and ideas which are fundamental to accounting practice. The term “convention” is used to signify customs or traditions as a guide to the preparation of accounting statements. The following accounting principles into “concepts” and “conventions”.


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