Definition and Explanation
The principle of adequate disclosure demands full disclosure of all material matters that can affect financial statements and are of interest to users of accounting information.
This principle requires the disclosure of appropriate changes in financial statements that can be useful and not misleading to users.
Thus, according to this principle, all necessary facts must be disclosed to the users of financial statements (i.e., proprietors, creditors, and investors). Full disclosure may be made either in the body of the financial statements or in footnotes.
This example focuses on the disclosure of contingent liabilities as a footnote after the 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.
The principle of adequate disclosure requires accountants to:
- Present adequate information (i.e., sufficient breakdown and details) in the income statement or balance sheet, either within the body of these statements or by way of notes, that satisfies the needs of all users
- Disclose the accounting policies and internal rules affecting accounting statements so that the users of these statements can evaluate them in a meaningful manner.