The whole aim of financial statements is to communicate with various users or stakeholders of the company. For effective communication, financial statements need to have certain qualities.
Qualities of financial statement
It should be easy to understand by its users or stakeholders.
It should be relevant to make a decision.
It should be materiality as it provides thresholds to financial statement.
It should be relevant to be useful to analyze.
It should faithfully represent the financial transaction and other events.
The information contain in financial statement must be neutral.
The information on financial statement must be complete.
It should be comparable to identify the trends.
Major headings of financial statement
Assets: Assets are the available resources that are under the control of the company. It is the result of past financial transactions.
Liabilities: Liabilities are the borrowed resources that are definitely not under control of the company. It is an obligation to the company.
Equity: Equity is the actual net worth of the company. It determines whether the company is in strong position or not.
Revenue: Revenue is an economic benefit during the accounting period. It also shows the result of past financial transactions.
Expenses: Similarly, an expense is an economic deficit that incurred during the operation of various financial transactions.
Quality financial statement includes all these headings during the preparation. Without these qualities and headings, financial statement cannot show true financial condition or position of the company. Hence, these qualities and headings are required.
