FINANCIAL REPORTING –Meaning &

Accounting Concepts, Conventions

Ca Bharatish Ballal
bballal@gmail.com
9844610755

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 Meaning of financial reporting
• These days ownership & management of business are divided
• Every business has many stakeholders
• Business managers have financial goals
– Profit maximization or wealth maximization
• Measuring profits or wealth is possible only through various
financial statements
• Major financial statements prepared are
– Profit & Loss Account(Income Statement)
– Balance Sheet(Statement of Affairs)
– Cash Flow Statement
• Presenting of financial statements of a business to
different stakeholders(including Owners) is called
Financial Reporting.
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 Nature of financial statements
• Financial statements are based on accounting
information(books of accounts)
• Accounting information are based not only on
facts but are at times based on
– estimates,
– assumptions,concepts and standards(principles or
practices)
• Hence proper knowledge of these assumptions
etc is required to prepare or read and analyze
the financial statements
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 Significance of Accounting
principles /practices
• Accounting achieves its objectives only through
these conventions , principles or standards,
practices
• Comparability of financial statements is made
possible through these .
• At times it is mandatory to follow these
principles, practices
Principles followed in preparation of financial
statements
• Understandability
– while preparing the financial statements complex and highly
technical language should not be used whereby the user is
confused
• Relevance
– accounting information must assist a user to form, confirm or
maybe revise a view - usually in the context of making a decision
• Reliability
– truthful, accurate, complete, capable of being verified
• Objectivity
– not biased towards a particular user group or vested interest.
• Substance over form
– recorded based in accordance with their substance and
economic reality.
• Full , fair and adequate disclosure
 Category of Accounting
Principles/Practices
• Major categories are
– Accounting assumptions/conventions
– Accounting concepts
– Accounting Standards
• International Accounting Standards
• International Financial Reporting Standards
• Accounting Standards stipulated by authority at national level for
example , Indian Accounting Standards issued by ICAI(Institute of
Chartered Accountants of India)
 Accounting
assumptions/conventions
• These are assumptions that are universally
followed by all accountants.
– Accrual(sometimes treated as
concept)
• Every item is to be accounted on due basis
– Going concern
• Business exists tomorrow also.Based on cost concept
– Consistency
• Year to year same policies to be followed to have meaningful
comparison and performance evaluation
 Accounting Concepts
• Entity concept
– Business and owner are different
– Business should record only its transactions
• Money measurement concept
– Whatever can be measured in terms of money is to be
recorded
– Everything connected with business is to valued in terms of
money
• Periodicity concept
– Performance can be measured and compared in specified
time frames
• Cost concept
– Changing prices are not considered, only historic cost is
considered
 Accounting Concepts-2
• Realization concept
– Only when you sell , you record the sale value
• Dual aspect concept
– Double entry principle
• Conservatism concept
– should not anticipate income but should provide for all losses
• Matching concept
– based on the accrual convention and periodicity concept , revenues and
expenditure are to be matched
• Materiality
– Items involving judgment should be based on extent of significance from
user’s point of view
• Prudence
– a cautious view is taken for future problems and costs of the business.