How can Financial Statements be adversely affected if the substance of a transaction is not recorded?

ompleteness demands all financial transactions represent the final picture of each business activity. Companies must record each transaction in its full form. If a transaction has multiple parts that will occur over time, Accountants must only record the portion that affects the current accounting period. Disclosures are often necessary to inform stakeholders about long transactions. Any schedules or other calculations necessary to record transactions may also need disclosure to stakeholders.

Relevance means that a financial transaction has an impact on the company. For example, the cost paid several years ago for assets should not factor into replacement decisions. The price paid originally is not likely to occur again. Therefore, accountants should not include the information in any reports for making new a purchase. Another example of relevance in substance over form is where cost differs under different alternatives; only the alternative considered has a relevant cost.

Accuracy in substance over form dictates all transactions recorded are free from error. Calculations should be clear and concise, showing the effect of financial information. In many cases, an accounting manager or supervisor may need to sign off on accounting reports and statements. This signature indicates a second person reviewed the documents, calculations, and transactions for accuracy. Reconciliations may also be necessary to test for accuracy.