FINANCIAL STATEMENTS

The problems for companies in applying the accruals, prudence and going concern concepts when preparing financial statements

The problems for companies in applying the accruals, prudence and going concern concepts when preparing financial statements

Introduction to Financial Statements

One of the steps included in the accounting cycle is the preparation of the principal financial statements. They are the Income Statement and the Balance Sheet. These financial statements are a means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Once the worksheet is completed, it is easy to prepare the financial statements as the necessary data have already been summarized. A third financial statement, which is the Statement of Cash Flows, provides information about cash receipts and cash payments into operating, investing, and financing activities.

A Balance Sheet is a formal statement that shows the financial condition of the business as of a given date. It reports the resources of the business (assets), its obligations (liabilities), and the residual ownership (capital or owner's equity) (Wood, 2005). The Income statement, on the other hand, shows the results of the operations during a given time period. It summarizes business activities for a given period and reports the net income or loss resulting from operations. It contains the nominal accounts or the revenue and expense accounts.

Fundamental Accounting Concepts

All financial statements should be created, preserved and presented according to the concepts and conventions that follow. Accounting concepts and conventions are the rules and guidelines by which the accountant lives. There are four general accounting concepts, although for some there are even more as each concept is interrelated with the other concepts. The four basic concepts are the going concern concept, accruals or matching concept, consistency concept, and the prudence concept.

The going concern concept is the underlying assumption that any accountant makes in preparing the set of accounts. It means that the business under consideration will remain in existence for the foreseeable future (Black, 2007). Hence, it is understood that the venture has neither the objective nor necessitate liquidating or restraining materially the scale of its operations. However, if such intention or need exists, a different basis is needed in the preparation of the said statements, therefore disclosing the former basis used.

Second is the accrual concept, or otherwise known as the matching principle. The purpose of this concept is to be sure that all revenues and costs are recorded exactly ...