BA204 - Financial Accounting: Exploring the Relevance of Principles

This essay explores the relevance and importance of accounting principles in financial statements. It highlights key principles such as relevance, faithful representation, comparability, verifiability, timeliness, and understandability, explaining how each contributes to the quality and reliability of financial reporting. The essay emphasizes that relevant information enables informed decision-making, faithful representations ensure transparency, comparability facilitates performance evaluation, verifiability confirms accuracy, timeliness guarantees usefulness, and understandability makes financial statements accessible to a wide audience. It argues that adherence to these principles is crucial for users and accountants alike, ensuring that financial statements provide a true and fair view of a company's financial position and performance.

Accounting Principles play very important part in the life of users and accountants. Following are some
of the examples through which we can come to know about the relevance of principles:
1) Relevance: The accounting information given in the financial statements should be relevant to
the business of the company. If irrelevant information is given in the financial statements, then
the users would not be able to take correct decision about the investment through which they
become capable of taking the decisions. The notes to accounts should be relevant to the
financial statements presented above. Relevance also creates interest in the mind of reader of
Annual report. If the information is relevant then the investor will read whole annual report
before investing and then invest, if the information contained in the annual report is not
relevant then the investor will loose his interest from the company and will invest in some other
company.
2) Faithful representations: The representations given by the management should be faithful
because it is the responsibility of the management to prepare financial statements. Auditor just
has to give his opinion. The preparation of the financial statement is in the hand of
management, they can make window dressing with the financial statements which does not
reveal true picture about the company. So, management should be faithful while preparing the
financial statements.
3) Comparability: The financial statements prepared by the management should be comparable
with the previous year’s performance otherwise an investor cannot take any decision.
Comparison helps in taking decision. In other word, performance of the company can only be
judged if we compare current year performance with the previous year figures.
4) Verifiability: The financial statements should be verified by the management. It should be
signed and verified from the management which shows that the financial statements are
verified from the management.
5) Timeliness: Every report has a purpose if it is presented with in the timeline. If time has gone,
then there is no benefit of publishing the report. No one can make decision from stale
information. Stale information is of no use.
6) Understandability: The financial statements should be presented in such a simple way that it
can be understood even by a layman who is having basic knowledge about the accounts and
finance. Technical words should be avoided if can be. Instead of technical words, simple words
be used which can be understood by every reader. It should also be presented in such a way
that it does not become complex to understand. It’s very important to understand the financial
statements, if somebody wants to make some investment decision. Without understanding the
financials, no one can take any decision. It’s not only about understanding the figures of
financials, but it’s also important to understand the working of the company.