The concepts of conservation, also known as the concept of prudence Is often stated as do not record the future Income but record all possible losses. This means an accounting should follow a conservative approach, should record lowest possible value for assets and revenue and the highest possible value for liabilities and expenses. According to this principle, the principle of ‘anticipate no profit but provide for all probable losses ‘ should be applied.
The valuation of stock-in -trade at a lower of cost or net realizable value and making the revisions for doubtful debts and discount debtors are the applications of this principle . In other words , the principle of conservatism requires that In the situation of uncertainty and doubt , the business transactions should be recorded in such a manner that the profits and assets are not overstated and the losses and liabilities are not understated. As a consequence of the application of this concept net assets are more likely to be understated than overstated, and Income Is more likely to be understated.
It has been challenged by many writers on the ground that It starts In the way of fair determination of profit ND the financial position of the business enterprises. Conservation must be applied rationally as over -conservation may results in misrepresentation . Nowadays, the conservatism principle is being replaced by the prudence principle which requires that the conservation principle should be applied rationally only in circumstances in which great uncertainty and doubt exists as the over – conservatism may result in misrepresentation.
Solon b. The Balance Sheet may be defined as “A Statement which sets out the assets and liabilities of a firm an institution as at a certain date. It shows the status of the equines as at a given moment of time , in so far as accounting figures can show its status . After preparing the trading and profit and loss account the final account to be prepared , in preparing final accounts remains balance sheet. The basic purpose of preparing the balance sheets Is to ascertain the financial position of a business; I. . , to know what the business owes and what It owns on a certain date. The funds flow statement Is a financial statement which reveals the methods by which the business has been financed and how it has used its funds between the opening and closing balance sheet dates . The funds statement describe the sources from which additional funds were derived and the uses to which these funds were put. A Summary of main points of difference between funds flow and balance sheet.
Balance sheet Is a statement showing the financial position of the concern on a particular date. The asset side portrays the development of resources In various type of properties an liabilities side indicates the manner in which these resources are obtained . It shows all assets and liabilities whether current or fixed, tangible or intangible etc. , while funds flow statement shows the changes in current assets an rent liabilities during a particular period of time 2.
Balance sheets shows the total financial position on a particular date and in this way, it Is of a historical nature an therefore, Its utility Is very Limited for the management . On the other hand, funds changes in working capital during the period of two balance sheets. 3. Funds flow statement is an analysis and control device for the Management . Management can ensure the long term an the short term solvency of the firm by studying the internal funds flow cycles. It is a modern technique of knowing the inflows and outflows of ends during a particular period . Lance sheet represents the balance of various assets an liabilities and does not present analysis of any kind. 4. There are two views of h financial position of the firm-long term an short-term. Short -term financial position means the technical solvency of the firm in the near future while on the other hand , long term financial position means future financial structure of the firm . Both are inter relate but there is a differences in their analysis.
