Principle of adequate disclosure
Definition and explanation
The Principle of adequate disclosure demands full disclosure of all material matters which can affect the financial statements and are of the interest of users of accounting information. It requires the disclosure of
appropriate changes in financial statements which can be more useful and not misleading to its users. Thus according to the Principle of adequate disclosure, all necessary facts must be disclosed to the users of financial statements (proprietors, creditors and investors). Full disclosure may be made either in the body of the financial statements or in footnotes.
Disclosure of Contingent Liabilities as a footnote after Balance Sheet. There are a large number of areas where a business is free to formulate its own accounting policies without violating any of the generally accepted accounting principles or concepts.
For example, companies are free to choose the method of computing depreciation and to select the rates of depreciation, or set the limit for what is or is not a capital expenditure, etc. The principle of adequate disclosure requires accountants to:
- have adequate information (i.e., sufficient break-down and details) included in the income statement or balance sheet, either within the body of these statements or by way of notes, that would be needed by all the different intending users of such statements.
- Disclose the accounting policies and internal rules affecting the accounting statements so that the users of these statements can evaluate them in a meaningful manner.