Purpose Financial Statement Analysis
Generally accounts may be kept on cash basis, accrual basis or on the basis of mixer of both the methods. When accounts are kept on accrual basis, the assets, liabilities, income and expenses are recognized (and recorded) on due basis i.e. as and when the rights to receive any income / assets is created or obligation to pay expenses / liabilities are recognised under the law of contract / sale of goods or other applicable laws. The main purpose of adoption of such method is restrict the arbitrary power in the hand of management to change the result of the company i.e. its profits or losses, by delaying / accelerating the payment. Consequently time of making / receiving payment is …show more content…
It gives stability and certain policy direction to the management to run the business on the long term interest of the company. Therefore accounting assumes that the business will continue to run for an indefinitely long period in the future unless there is good evidence to the contrary. If however, if there are good reasons to believe that the business, or some part of it, is going to be liquidated, than the resources would be reported at their liquidation value. Such circumstances are uncommon.
6. The Dual-Aspect Concept
As stated above, the resources owned by a business are called "assets." The claims of various parties against these assets are called "equities." There are two types of equities: (1) liabilities, which are the claim of the creditors, i.e., everyone rather than the owners of the business; and (2) owners equity (or "capital," or "proprietorship"), which is the claim of the owners of the business. Since all of the assets of a business are claimed by someone (either by the owner or by some outside party) and since the total of these claims cannot exceeds the amount of assets to be claimed, it follows that