Presentation on

Accounting Principles

Presented by Ashiq Hossain

Daffodil International University

CONCEPTUAL FRAMEWORK OF ACCOUNTING

Generally accepted accounting principles are a set of rules and practices that are recognized as a general guide for financial reporting purposes.

Generally accepted means that these principles must have substantial authoritative support.

FASB’S CONCEPTUAL FRAMEWORK

The conceptual framework consists of:

Objective of financial reporting.

Qualitative characteristics of accounting information (Understandability, reliability, relevance, comparability & consistency)

Elements of financial statements(Assets, liabilities, revenues, cost, owner’s equity)

Recognition and measurement criteria(Assumption, principles, constraints)

OBJECTIVE OF FINANCIAL REPORTING

The objective of financial reporting is to provide

information that is useful for decision making.

The accounting alternative selected should be one that generates the most useful financial information for decision making.To be useful, information should possess the following qualitative characteristics:

Understandability Relevance Reliability Comparability and consistency

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

UNDERSTANDABILITY

• Information must be understandable by its users.

• Users are assumed to have a reasonable comprehension of and ability to study, the accounting, business and economic concepts needed to understand the information.

RELEVANCE

• Accounting information is relevant if it makes a difference in a decision.

• Relevant information helps users forecast future events (predictive value), or it confirms of corrects prior expectations (feedback value).

• Information must be available to decision makers before it loses its capacity to influence their decisions (timeliness).

RELIABILITY

• Reliability of information means that the information is free of error and bias - it can be depended on.

• To be reliable, accounting information must be verifiable - there must be proof that it is free of error and bias.

• The information must be a faithful representation of what it purports to be - it must be factual.

COMPARABILITY AND CONSISTENCY

• Comparability means that the information should be comparable with accounting information about other enterprises.

• Consistency means that the same accounting principles and methods should be used from year to year within a company.

Elements of financial statements

Assets Liabilities Revenues Cost Owner’s equity

ASSETS

Assets are resources a business owns. The business uses its assets in carrying out such activities as production and sales. The common characteristics possessed by all assets is the capacity to provide future services or benefits.

Liabilities

Liabilities are claims against assets- that is existing debts

and obligations. Business of all sizes usually borrow money and purchase merchandise on credit.

Owner’s EquityThe ownership claim on total assets is owner’s equity. Owner’s equity=Assets-Liabilities. The assets of a business are claimed by either creditors or owners.

RevenueRevenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. Common source of revenue are: sales, fees, services, commissions, interests, dividend, royalties and rent.

ExpensesExpenses are the of assets consumed or services used in the process of earning revenue. They are decreases in owner’s equity that result from operating the business. Scarifies of resources benefit of receive for more than one year.

RECOGNITION AND MEASUREMENTCRITERIA

• Recognition and measurement criteria used by accountants to solve practical problems include assumptions, principles and constraints.

• Assumptions provide a foundation for the accounting process.

• Principles indicate how economic events should be reported in the accounting process.

• Constraints permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information.

GOING CONCERN ASSUMPTIONGOING CONCERN ASSUMPTION

• The going concern assumption assumes that the The going concern assumption assumes that the enterprise will continue to operate in the enterprise will continue to operate in the foreseeable future for many years.foreseeable future for many years.

Implications: Capital assets are recorded at cost Implications: Capital assets are recorded at cost instead of liquidation value, amortization is used, instead of liquidation value, amortization is used, items are labeled as current or non-current.items are labeled as current or non-current.

MONETARY UNIT ASSUMPTION

• The monetary unit assumption states that only transaction data capable of being expressed in terms of money should be included in the accounting records of the economic entity.

• Also assumes unit of measure ($) remains sufficiently stable over time ignores inflationary and deflationary effects.

ECONOMIC ENTITY ASSUMPTION

The economic entity assumption states that the owner and the business are different from each other.

Example: The owner and Square pharmaceuticals co. Ltd. are different from each other.

TIME PERIOD ASSUMPTION

The time period assumption states that the economic life of a business can be divided into artificial time periods.

Examples: months, quarters and years.

REVENUE RECOGNITION PRINCIPLE

• The revenue recognition principle says that revenue should be recognized in the accounting period in which it is earned.

Production/sales essentially completeRevenues measurable Collection reasonably assuredExpenses determinable

MATCHING PRINCIPLE

• Expense recognition is traditionally tied to revenue Expense recognition is traditionally tied to revenue recognition.recognition.

• This practice - referred to as the matching principle - This practice - referred to as the matching principle - dictates that expenses be matched with revenues in the dictates that expenses be matched with revenues in the period in which efforts are expended to generate period in which efforts are expended to generate revenues.revenues.

FULL DISCLOSURE PRICIPLEFULL DISCLOSURE PRICIPLE

The full disclosure principle requires that circumstances and events that make a difference to financial statement users be disclosed.

Compliance with the full disclosure principle is accomplished through

1. The data in the financial statements

2. The notes that accompany the statements. The summary of significant accounting policies

is usually the first note to the financial statements.

COST PRINCIPLECOST PRINCIPLE

• The cost principle dictates that assets are recorded at their historic cost.

• Cost is used because it is both relevant and reliable.

1. Cost is relevant because it represents the price paid, the assets sacrificed or the commitment made at the date of acquisition.

2. Cost is reliable because it is objectively measurable, factual and verifiable.

CONSTRAINTS IN ACCOUNTINGCONSTRAINTS IN ACCOUNTING

• Constraints permit a company to modify generally accepted accounting principles without reducing the usefulness of reported information.

• The constraints are cost-benefit and materiality.

1. Cost-benefit means that the value of information should be greater than the cost of providing it.

2. Materiality relates to an item’s impact on a firm’s overall financial condition and operations.

Reference

Weygandt, Kiseo, Kimmel-Accounting Principles, 8th edition