Final accounts – an understanding
In the previous post, as shared in the Learning & Development group, I had shared five basic concepts on which financial statements / accounting is based on.
Today, I cover more fundamental principles which apply to all entities in the perspective of financial accounting.
- Periodicity – The economic life of a business can be divided into artificial time periods, preferably one year. The benefit of a transaction should be bound by reasonable periods, so as to distinguish between long-term and short-term business results, commonly known in the accounting world as the financial year.
- Realization – Each transaction should have actually been executed and the related money realized / realizable. The recording needs to be done at the realized / realizable value. Companies should recognize revenue / expenses in the accounting period in which it is earned.
- Matching – Similar items need to be matched to give a fair view of the operations. These could be based on activity, type of business, nature of services etc. Efforts (expenses) should be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so.
- Disclosure – The business should ensure proper and full disclosure to all stakeholders, provided through financial statements, notes to the financial statements, and supplementary information. Circumstances and events that make a difference to financial statement users should be disclosed.
- Conservatism – A conservative approach should be followed for accounting purposes and attempts to overstate values of the assets, liabilities, incomes or expenses must be avoided. When in doubt, choose the method that will be least likely to overstate assets and income.