module 2- financial accounting principles

8/9/2019 Module 2- Financial Accounting Principles

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Financial Accounting Principles

Lucky Yona


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Accounting Policies

The principles, bases, conventions, rules and procedures adopted bymanagement /company in preparing and presenting financialstatements.

An entity should adopt the accounting policies which are mostappropriate to its particular circumstances for the purpose of giving atrue and fair view.

An entity accounting policiesshould be reviewed regularly that theyremain the most appropriate to its particular circumstances.

Review the policy if it is judged more appropriate to theentity particularcircumstances than the present accounting policy.

However, all changes in accounting policy should adhere toaccounting standards issued by the International Accounting StandardBoard ( IASB)


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These are common rules in preparing financialAccounts reports.

Broad basic assumptions, working rules anddecision criteria, which underlie the periodic financialstatements of the businessenterprises.

Where financial reports are prepared according tothese principles

Inter comparison of financial information between entities iseasy, thushelping to compare financial performance.

Intercomparison between periods within thesame companyis facilitated.


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1. Stability of Currency

Money is a unit of measurement. Financial Accountingcannot be record any transaction which cannot be

Quantified in monetary terms.

Money should be assumed to bestable over a reporting

time.

2. Accrual Principle Incomeshould be recognized and accounted for as theyareearned even though cashhas not been collected

Expenditureshould be recognized and accounted for at

the time they are incurred though not yet paid.


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3.Accounting Entity Principle Business Entity should besegregated from its owner

Theseparation defines the boundary between personal andbusiness transactions.

Revenues and expenses should be kept separate frompersonal expenses. This applies even for partnerships andsole proprietorships. The entity concept does notnecessarily refer to a legal entity.

4.The Going Concern Principle Financial Statement should be prepared on assumption that the

enterprise will continue in operation for the foreseable future,and that there is no intention or necessity to wind up orsignificantly curtail thescale of theenterprises.

No provisions are made for losses in value of assets.


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5. Prudence or Conservatism

Profitsshould not be anticipated but only when realized wherelosses can be anticipated .This minimizes the risks of being overoptimistic

Prudence or Conservatism states that when choosingbetween two solutions, the one that will be least likely tooverstate assets and income should be picked. Theimplication in all this is that contingent (doubtful) items ofrevenue should not be anticipated and should not therefore

be recorded, whereas if such items are items of expenditure,they should be recognised and recorded.

Essentially it implies that the lowest values of assets and revenueand highest values of liabilities and expensesshould preferablybe reported.

6.


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The Cost ConceptAll assetsAcquired must be valued at cost orMarketValue.

It implies an item is to be recognized at an exchange price

at the date of purchase and is to beshown in the financial

statement at that value or market value.


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7.The Consistency Principle.

The treatment of like items/eventsshould be recorded andreported in consistent manner from period to period.

The adoption of this principle makes financial statements

more comparable and avoids distortion and manipulation of

income and balancesheet items.

Violation can only be accepted if circumstanceshave

changed so much to warrant distortion of the true and fair

view of the financial statements.


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8.TheMatching Principle

Revenueshould be matched withexpenses forthesame accounting period to correctly determine

the periods net income.

Dangers of not matching:- Incorrectly

de

te

rmination of net incom

e.


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Realization Principle

Asale is recognized when the produce or aservice has been delivered and the buyer

has accepted the invoice.

At this point ownership is transferred and the

transaction is recognized assale revenue


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Realization Principle.

In the books of account, goodshave been replaced

by either cash or by a delivery. Revenue and costs are recorded when they are

incurred not when cash is received or paid.

Asale made in one accounting period is classed a

revenueeven though the inflow of cash occurs in the

next accounting period.Asale is realized when a

good is delivered.


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10.TheMateriality Principle

Information is material if its omission or misstatement could

influence theeconomic decision of users taken on the basis ofthe financial statements.

Materiality depends on thesize of the item orerror judged inthe particular circumstances of its omission or misstatement.

Thus, materiality provides a threshold or cut-off point ratherthan being a primary qualitative characteristic which informationmust have if it is to be useful." `


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Exercises

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module 2- financial accounting principles

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