"Nature & Characteristics of Financial Statements"

*   Nature Financial Statements :

                               Financial Statements are plain statements based on historical recorded facts and figures. They are uncompromising in their objectives, nature and truthfulness. They reflect a judicious combination of recorded fact's, accounting principles, concepts and connections, personal judgement and sometimes and sometimes estimate.
                               Thus, financial statements are affected by three factors i.e., recorded facts, accounting conventions and personal judgement.

1. By recorded facts is meant the data contained in statements, which have been already recorded in accounting recorded.                                                                            Example : Cash in hand and at bank, cost of fixed assets, amounts due from customers and due to suppliers of goods are all recorded facts represented numerically.                                                               
2. Financial Statements are prepared by adhering to certain concepts and established conventions.                  
3. In agreement with the recorded facts and accounting concepts and conventions the role of personal judgement, estimates and opinions, are to be emphasized especially when two or more alternative procedures are available and which are equally acceptable.                        Example : An asset could be depreciated under several methods, and inventory could be valued under different methods. Under such circumstances, personal opinion and judgement play and important role as to which of the methods are in closer conformity with the accounting standards and concepts in a particulars circumstance or case.

*   Characteristics  Financial Statements :

                                       Financial Statements are regarded as indices of an enterprise's performance and position. As such, extreme care and caution should be exercised while preparing these statements. Financial Statements generally reflect the following observable characteristics :

1.   Internal Audience :-

                                 Financial Statements fare intended for those who have an interest in a given business enterprise. They have to be prepared on the assumption that the user is generally familiar with business practices as well as the meaning and implication of the terms used in that business. 

2.   Articulation :-

                               The basic financial statements are interrelated and therefore are said to be 'articulated'.

 Example :   Profit & Loss Account shows the financial results of operations and represents an increase or decrease in resources that is reflected in the various balances din the Balance Sheet.

3.   Historical Nature :-

                               Financial Statements generally report what has happened, in the past. Though they are used increasingly as the basis for the future by prospective investors and creditors, they are not intended to provided estimates of future economic activities and their effects on income and equity. 

4.   Legal and Economics Consequences :-

                               Financial Statements reflect elements of both economics and law. They are conceptually oriented towards economics, but many of the concepts and conventions have their origin in law.

Example :    Conventions of Disclosure and Materiality. 

5.   Technical Terminology :-

                                Since financial statements are products of a technical process called "Accounting", they involve the use of technical terms. It is therefore, important that the users of these statements should be familiar with the different terms used therein and conversant with their interpretations and meanings.

6.   Summarization and Classification :-

                                 The volume of business transactions affecting the business operations are so vast that summarization and classification of business events and items alone will enable the reader to draw out useful conclusions. 

7.   Money Terms :-

                              All business transactions are quantified, measured and related in monetary terms. In the absence of this monetary unit of measurement, financial statements will be meaningless. 

8.   Various Valuation Methods :-

                                       The valuation methods are not uniform for all items found in a Balance Sheet.

9.   Accrual Basis :-

                              Most financial statements are prepared on accrual basis rather than on cash basis i.e., taking into account all incomes due but not received, and all expenses due but not paid.

10.  Need for Estimates and Judgments :-

                                 Under more than one circumstance, the facts and figures to be presented through financial statements are to be based on estimates, personal opinions and judgments. 

Example :   Rate of depreciation, the useful economic life of a fixed assets, provision for doubtful debts is all instances where estimates and personal judgments are involved. 

11.  Verifiability :-

                          It is essential that the facts presented through financial statements are susceptible to objective verification, so that the reliability of these statements can be improved.

12.  Conservatism :-

                          Wherever and whenever estimates and personal judgments become essential during the course of preparation of financial statements, such estimates, should be based moderately on a conservative basis to avoid any possibility of overstating the assets and incomes.