Financial statements are prepared based on which concept?

Financial statements are primarily prepared based on the accrual concept. This accounting principle dictates that revenues and expenses should be recognized when they are earned or incurred, not necessarily when cash is received or paid. This aligns with the objective of financial reporting, which is to provide a clear and accurate representation of a company’s financial position and performance over a specific period.

By utilizing the accrual concept, financial statements capture all transactions that have occurred during the reporting period, ensuring that stakeholders receive a comprehensive view of the company’s financial activities. This method enables better forecasting and analysis as it reflects the company’s actual financial performance and obligations, providing a foundation for informed decision-making by investors, creditors, and management.

The other concepts mentioned, such as fundamental accounting, future profitability, and corporate law, while related in broader definitions of accounting and business practices, do not specifically underlie the preparation of financial statements in the same fundamental way that the accrual concept does.