Accounting Principles and Concepts (1).ppt

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1. Accounting Principles and
Concepts

2. Generally Accepted Accounting
Principles
•GAAP-these principles are not laws, but
are guidelines determined primarily by the
Financial Accounting Standard Board
(FASB) and its predecessor, the
Accounting Principles Board (APB).
•Provide the general framework for
determining what information is included in
financial statements and how this
information is to be prepared and
presented.

3. Accounting Entity Principle
•An accounting entity consists of people, assets, liabilities
and activities devoted to a specific economic purposes.
Accounting information is developed for clearly identified
accounting entities such as sole proprietorships,
partnerships, and corporations.
•In any of these arrangements, nonrelated business
interests are accounted for separately.
•In corporations, accounting entity coincides with the legal
entity.
•In proprietorships, it is the accounting entity but the
proprietor is the legal entity liable for both personal and
business obligations.

4. Going-Concern Principle
•Assumes that an accounting entity will continue
to operate indefinitely, thus allowing a business
to defer certain costs that are to be charged
against the revenues of future periods.

5. Time Period Principle
•Financial statements are prepared for specific
relatively brief accounting periods, ordinarily one
year, in order to assists in decision making and
for tax purposes.
•The year chosen for financial measurement is
referred to as the fiscal year

6. Monetary Principle
•States that money is the basic unit of measurement for
financial reporting.
•The principle also allows for the comparison of financial
statements between and within firms.
•The monetary principle assumes that money is a stable
unit of value over time. However this assumption is
unrealistic because money loses its value over time.
•.

7. Historical Cost Principle
•Involves valuing assets at the original cost of
acquiring them
•But should consider adjustments for price level
changes. These involves the use of price level
indices, .
•

8. Objectivity Principle
•Requires unbiased verifiable measurements.
The accountant seeks the most objective
evidence available in order to support financial
statements. This may include invoices, cancelled
checks, bank statements, inventory counts,
deeds and contracts and use of historical costs.
•.

9. Consistency Principle
•Related to the objectivity principle. It requires
that a particular accounting technique not be
changed from period to period, thus facilitating
comparison of financial statements over time
•On occasion, however, the management will
change to a different accounting method when
the change will serve the needs of the user’s of
the statement e.g change in depreciation
method from linear to sum of years digit method.

10. Conservatism Principle
•Related to the objectivity principle
•Requires the selection of accounting method
that neither overstate nor understate the facts.
•However, accounting takes place in an
environment of uncertainty..

11. Materiality Principle
•Refers to the relative importance of an item. An item is
considered to be material if it significantly affects the
financial statements, thus influencing the decisions of
prudent users of the statements.
•Materiality of an item depends not only on the amount
but also on the nature of the item.

12. Full Disclosure Principle
•Requires that all relevant facts concerning the
financial position of a business be presented in
the financial statements.
•Full disclosure can be accomplished either in the
body of a financial statement or in its footnotes.

13. Realization Principle
•Fundamental in the accrual basis of
accounting
•States that revenue is recognized when it
is realized ,i.e.when the earning process is
complete and when objective evidence
exists as to the amount of revenue earned
•Thus revenue is recognized at the time
goods are sold or services rendered.

14. Matching Principle
•The measurement of an expense occurs in two
phases.
•The first stage involves measuring the cost of
goods and services consumed or expired in the
process of generating revenue.
•The second phase considers matching cost and
revenue and involves determining when the
goods and services acquired have contributed to
revenue, at which time their cost becomes an
expense.