How understandability is achieved in Financial Statements

How understandability is achieved in Financial Statements

Financial statement should allow the easy understanding of the information presented in financial statement and there should be no difficult faced by the user for understanding the financial statement. The understandability can be achieved through the following.

1. Easy Language: financial statement must use the easy language in the financial statement. Easy language is a relative terms but management should keep in mind that a person with reasonable knowledge of accounting and economic should be able to understand the financial statement.

2. Disclosures & Explanation: financial statement must provide relevant disclosure and explanation for complex nature of information. These disclosure may be financial and non financial (descriptive).

3. Narration of Policies: a comprehensive narration of different accounting policies is a very important factor for understanding the financial statements; therefore management should describe the applicable policies in details.

4. Application of International accounting Standard: application of international accounting standards in the preparation of financial statements is also a very effective tool to improve understanding level of financial statements.

How a lay man can understand the financial statement

For understanding of financial statement user must have a reasonable knowledge of economic, business and accounting. This knowledge can be obtained by having a relevant degree, reading the business page, reading the technical articles of business magazine, sharing the ideas with an expert, attending short courses and examining the different financial statement in details.