Accounting Concepts Definitions Part : 6 ( Faithful representation concept )

Accounting Concepts Definitions Part : 6

accounting Concepts

Faithful Representation

Financial reporting needs the accounts to show a picture that is presented in a form which is fitting to the guidelines and well documented. Being stated, this notion creates a wide range of confusion; because, the reporting should be identified in a way that will be believed by the users of the information to be true. Professional skepticism is the part and parcel of accounting and so getting beyond that is the objective of such representation.

Faithful representation states:

“The financial reports should reflect the existing standards and rules/ guidelines in place. It should also put into effect any suggestions made by an independent reviewer who is appointed from outside. The reports should be totally designed in a fashion to fit the users who will use the information.”

This obviously has three parts and those three have different functionalities. Get to know that all these are interrelated and equally important to fulfill the definition.

Now, this definition will have some case study to make it all clear to you.

Case Study:

XYZ co. has their financial statements to assess and they have hired ABC farm to conduct that task. A member in ABC is in the BOD of XYZ co. Also the accounts in XYZ co. financial statements are not supported by documents. This is shown by:

A debtor paid debts which were deemed as uncollectible in the previous year. The name of the debtor was not disclosed.
All the expenditures don’t have supporting documents (Like- memos, invoices or, receipts)
The depreciation method is straight line and the rate is 10%. The depreciation method and rate was set without following any guideline or, industry standard.

Now, should the reports be deemed as faithfully represented?

The plain answer is-


And, now you know why. If you don’t then please go through the definition once more and everything will be clear to you as daylight.

The only reason is that all the requirements are not fulfilled in the first place. Moreover, the BOD member being the same person in the ABC co., an independent assessment organization, is not helping the situation. At the end it is expected that you have got a clear view of the whole thing and also got to find your way out in any compelling situation you are put at regarding this.

Keep in mind if any basic concept and principle/standard are not complied then the reporting is deemed as not a faithful representation.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>