“One of the characteristics of financial statements is neutrality”- Do you agree with this statement? Or Opening Balance Sheet of Mr. Amit is…

CA Intermediate · Advanced Accounting · MTP · May 2024
“One of the characteristics of financial statements is neutrality”- Do you agree with this statement? Or Opening Balance Sheet of Mr. Amit is showing the aggregate value of assets, liabilities and equity 16 lakh, 6 lakh and 10 lakh respectively. During accounting period, Mr. Amit has the following transactions: (1) Earned 10% dividend on 4,000 equity shares held of 100 each (2) Paid - 1,00,000 to creditors for settlement of 1,40,000 (3) Rent of the premises is outstanding - 20,000 (4) Mr. A withdrew - 18,000 for his personal use. You are required to show the effect of above transactions on Balance Sheet in the form of Assets – Liabilities = Equity after each transaction.

Suggested Answer and Working Notes:

Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in financial statement must be neutral, that is free from bias. Financial Statements are not neutral if by the selection or presentation of information, the focus of analysis could shift from one area of business to another thereby arriving at a totally different conclusion on the business results. Or Effects of each transaction on Balance sheet of the trader is shown below: Transactions Assets ₹ lakh – Liabilities ₹ lakh = Equity ₹ lakh Opening 16.00 – 6.00 = 10.00 (1) Dividend earned 16.40 – 6.00 = 10.80 (2) Settlement of Creditors 15.40 – 4.60 = 10.80 (3) Rent Outstanding 15.40 – 4.80 = 10.60 (4) Drawings 15.22 – 4.80 = 10.42

Topics: Framework for preparation and presentation of financial statements

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