2.18. Objectives of financial statements
Financial statements are prepared from accounting the records
maintained by the firm. The general accepted accounting principles and
procedures are followed to prepare these statements. The basic objective of
financial statements is to assist in decision making process. The other
objectives are:
To provide reliable financial data about economic resources and
obligations of a business enterprises;
To provide reliable data about changes in net resources
(resources minus obligations) of an enterprise that result from the profit
directed activities;
To provide financial data that assists in estimating the earnings
potential of an enterprise;
To disclose to the extent possible other information related to
the financial statement that is relevant to statement users.16
2.19. The qualities of accounting information
The accounting information must have some qualities in order to
its users. These qualities will help to avoid the misleading. These qualities
are:
15 ACCA paper 2.6, preparation of financial
statements, 2006
16 ACCA paper 1.1, preparation of financial statements
,2003
Relevance: the information should be relevant
enough to the needs of the users, so that it helps them to evaluate the
financial performance of the business and to draw conclusions from it.
Reliability: the information should be of a
standard that can be relied upon by external users, so that it is free from
errors and can be depended upon by the users in their decisions.
Comparability: accounts should be comparable with those of
other similar organizations and from one period to the next.
Understandability: the information should be in
a form that is understandable to the user groups.
Completeness: accounting systems should show all
aspects of the organization.
Lack of bias: accounting statements should not be biased towards
the needs of one user; they should be objective oriented.
Timeliness: accounting information should be
published as soon as possible on a periodic basis.17
2.20. The needs of an accounting system
An accounting system is an important tool whose existence is
undoubtedly important. Accounting is termed as the language of business. The
basic function of the language is to serve as a mean of communication.
Accounting also communicates the results of organization's operations to
various parties who have some stake in the business, i.e. the proprietor,
creditors, investors, government and other agencies. Though accounting is
generally associated with business, it is not only the business that makes use
of accounting.
The need of an accounting system is all the more great for the
person who is running a business or any other organization. He must know what
he owns, what he owes, whether he has earned a profit or suffered a loss on
account of running a business, what his financial position is i.e. whether he
will be in a position to meet all his commitments in the future or whether he
is in the process of becoming bankrupt.
Thus, an accounting system is designed to accumulate data
about an organization's financial affairs, classify the data in a meaningful
way and summarize it in periodic reports called financial
statements.18
17 Rajeshwar kumar sharma and R.S popli, principle and
practice of financial accounting, seventh edition, 1994
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