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Comparability Concept

One of the key characteristic of financial statements implies that the user of financial statements can compare the financial statements of an entity with the other enterprise's financial statements to analyse and evaluate their performance and financial position and to identify trends in an entity's performance with reasonable convenience.

Comparability is simply the quality of a financial statement that enables anyone to compare financial statement with other financial statements of the same company or financial statement of other companies with the similar business

EXAMPLE

An investor can compare the balance sheet of a company with the balance sheet of other company

A government agency can compare the year 2001 income statement of a firm with year 2002 income statement

Tax agency can compare the year 2001 income statement of a company with the year 2002 income statement of that company


Important to note:
  • Financial statements should be so prepared that they disclose the financial policies of an enterprise to enable the user of financial statements to differentiate the accounting policies that will help in making a valid comparison between the similar items in the account of different firms
  • The enterprise should change the financial policies when they become inappropriate for the firm because the comparability is not the same as uniformity
  • Corresponding information of upcoming financial periods should be disclosed to enable user of financial statements to make comparison over time

Prudence Concept

The prudence concept implies that the company should include a degree of caution in the exercise of judgments needed under the condition of uncertainty. In other words, assets and incomes should not be overstated while liabilities and expenses should not be understated

Prudence is caution exercised while preparing accounts and financial statements. However, it's not permitted to create secret or hidden reserves using prudence as justification

EXAMPLE

A Company started trading on January 1 and sold goods costing $50,000 on credit and at the end of the year, accounts receivable was $40,000. The company estimated that It is less likely to get paid from some debtors who owes debts amounting to $5000 out of $40,000 receivable

The company is now going to create a provision for doubtful debts of $5000. Sales will be shown in income statement at the full value i.e. $10,000 but the provision for doubt full debts will be expensed out in income statement. Since that $5000 is uncertain to be realized in the form of cash, prudence concept signifies that $5000 should not be included in the income of the company