At present every financial firm communicates the financial information to the external world by means of various financial statements and reports.
Such financial statements which are presented to others normally consist of balance sheet and profit and loss account. In fact, the statutory regulations differ from one country to another country and in some countries; the financial concerns are in a position to furnish the financial details on quarterly basis. In some countries, they have to furnish the information on half yearly basis.
Normally such information nowadays is made available through established news papers and dedicated websites.
In fact, the financial statements contain the summarized information of the firms’ financial affairs. This information is essential for financial analysis and necessary decision making in the case of bankers who are willing to extend the required finance to the firms.
While the financial institutions and bankers are in the process of considering sanction of any working limits or term loans to any firm, they require the financial details for the purpose of analysis and normally they demand such information for a period of three years. Apart from the above, the projected balance sheet for the ensuing year is also demanded by the bankers.
The commonly accepted accounting principles are very much useful in helping the users of financial information and such users are the stakeholders of the firm, creditors, bankers, suppliers, government regulators and many more.
The financial statements are prepared from the accounting records maintained by the firm by adopting the generally accepted accounting principles and such accounting principles are as mentioned below:
01. Business entity principle: According to this principle, the promoter individually is considered as a person and the firm as a business entity.
02. Going concern principle: According to this principle, the firm is assumed to have perpetual existence. The fixed assets namely; land, buildings and machinery are not intended to be sold off; however, they are held as operating assets for continuous running of the firm.
03. Monetary principle: According to this principle, money is treated as the unit of measurement and therefore balance sheet cannot record the assets of the firm which cannot be expressed in terms of money.
04. Historical principle: According to this principle, the costs reported are as on the date of acquisition of the assets and the revaluation of assets are not generally acceptable to the bankers and in the case of revaluation, if any and the fact such revaluation should necessarily be mentioned in the financial statements without fail.
05. Realization principle: The approximate period by which the revenues are realized is determined based upon the realization principle.
06. Accrual concept: The accounting period covers only the revenue and expenses pertaining to the period and ignores the period by which cash receipts are realized and payments are effected and this exercise is necessary for the purpose of determining the net income for the accounting period.
The knowledge of accounting principles will be very much helpful for the practicing bankers and financial analysts.