Financial statements are prepared according to international standards albeit with national governing boards agreed guidelines. In order to understand these guidelines, it helps to understand the objectives of financial reporting.

The objectives of financial reporting are as follows:

  • Provide useful information to the users of such financial reports. The information should be useful from a number of perspectives, such as whether to provide credit to a customer, whether to lend to a borrower, and whether to invest in a business.
  • To provide information about the cash flows which an entity is subjected, including the timing and uncertainty of cash flows. This information is critical for determining the liquidity of a business, which in turn can be used to evaluate whether an organization can continue as a going concern.
  • To disclose the obligations and economic resources of an entity. There should be an emphasis on the changes in liabilities and resources, which can be used to predict future cash flows.

In order to prepare the financial statements, it is important to adhere to certain fundamental accounting concepts:

Helps existing and potential investors and creditors and other users to assess the amounts, timing, and uncertainty of prospective net cash inflows to the enterprise

Going Concern: unless there is evidence to the contrary, it is assumed that a business will continue to trade normally for the foreseeable future. Accruals and Matching: revenue earned must be suitably matched against expenditure. Prudence:  if there are two acceptable accounting procedures, choose the one which gives the less optimistic view of profitability and asset values. Consistency: similar items should be accorded similar accounting treatments. Entity:  a business is an entity distinct from its owners. Money Measurement: accounts only deal with items to which monetary values can be attributed. Separate Valuation: each asset or liability must be valued separately. Materiality: only items material in amount or in their nature will affect the true and fair view given by a set of accounts. Historical Cost: transactions are recorded at the cost at which they occurred. Realization: revenue and profits are recognized when realized. Duality: every transaction has two effects.