Yes I am agree with the statement; The basic accounting concepts and principles limit the

accountants freedom in their duties. Its because the principles creates its own set of issues.
Nowadays, each company can prepare its statements in its own manner and the accounting
statements will vary in style. This makes accountants difficult to compare companies,
especially when they across different industries. Another problem might be face which not be
faced by accountants but by company is that principles-based accounting puts more
responsibility on the company. Without a strict set off accounting rules, a company will make
more reporting mistake which can lead them to legal problems.
Accruals Concept
An accrual is a journal entry that is used to recognize revenues and expenses that have been
earned or consumed, respectively, and for which the related cash amounts have not yet been
received or paid out. Accruals are needed to ensure that all revenue and expense elements are
recognized within the correct reporting period, irrespective of the timing of related cash
flows. Without accruals, the amount of revenue, expense, and profit or loss in a period will
not necessarily reflect the actual level of economic activity within a business. For example,
expense accrual for wages. An employer pays its employees once a month for the hours they
have worked through the 26th day of the month. The employer can accrue all additional
wages earned from the 27th through the last day of the month, to ensure that the full amount
of the wage expense is recognized.

Going Concern Concept

Financial statements are prepared assuming that the company is a going concern which
means that the company intends to continue its business and is able to do so. The status of

going concern is important because if the company is a going concern it has to follow the
generally accepted accounting standards. The auditors of the company determine whether the
company is a going concern or not at the date of the financial statements. Examples, an oil
and gas firm operating in Nigeria are stopped by a Nigerian court from carrying out
operations in Nigeria. The firm is not a going concern in Nigeria, because it has to shut down.
A nationalized refinery is in cash flows problems but the government of the country provided
a guarantee to the refinery to help it out with all payments, the refinery is a going concern
despite poor financial position.
Business Entity Concept
In accounting we treat a business or an organization and its owners as two separately
identifiable parties. This concept is called business entity concept. It means that personal
transactions of owners are treated separately from those of the business. Businesses are
organized either as a proprietorship, a partnership or a company. They differ on the level of
control the ultimate owners exercise on the business, but in all forms the personal
transactions of the owners are not mixed up with the transactions and accounts of the
business.As an example, a CPA has 3 rooms in a house he has rented for $3,000 per month.
He has setup a single-member accounting practice and uses one room for the purpose. Under
the business entity concept, only 1/3rd of the rent or $1,000 should be charged to business,
because the other 2 rooms or $2,000 worth of rent is expended for personal purposes.

Monetary Unit Assumption

The monetary unit assumption assumes that all business transactions and relationships
can be expressed in terms of money or monetary units. Money is the common

denominator in all economic activity and financial transactions. That is why we assume
that money is a good basis for comparing companies and other accounting
measurements. In other words, accounting looks at transactions that can be
communicated in money or monetary units. GAAP assumes that the monetary unit is
stable, reliable, relevant, and useful to all companies. It is also universally available. All
currencies are openly exchanged in world markets with varying exchange rates.
Monetary units like the US dollar and English pound can be easily exchanged for the
European Union Euro, Mexican peso, or the Japanese yen. Examples, a manufacturing
plant is started in 1955. It acquires a piece of land and builds a small factory on the land
costing $50,000 in 1955. Today, this piece of land and building is worth over $1,000,000
because of inflation. The monetary unit assumption does not take into consideration
inflation. The balance sheet of this company will still show the land and building at
historical cost unadjusted for inflation.During the middle of the night a retailer's store is
vandalized. The sign is spray-painted over, the windows are broken, and some
merchandise is stolen. The retailer's financial statements will only report a loss on the
damaged property. It will not report lost potential sales due to down time wait for repairs
or additional inventory because of the monetary unit assumption. Lost sales are
hypothetical and can't be measured in real monetary units.

Time period principle

Although businesses intend to continue in long-term, it is always helpful to account for their
performance and position based on certain time periods because it provides timely feedback
and helps in making timely decisions. Under time period assumption, we prepare financial
statements quarterly, half-yearly or annually. The income statement provides us an insight
into the performance of the company for a period of time. The balance sheet (also known as
the statement of financial position) provides us a snapshot of the business' financial position
(assets, liabilities and equity) at the end of the time period. The statement of cash flows and
the statement of changes in equity provide detail of how the company's financial position
changed during the time period. One implication of the time period assumption is that we
have to make estimates and judgments at the end of the time period to correctly decide which
events need to be reported in the current time period and which ones in the next. Revenue
recognition and matching principles are relevant to time period assumption. Revenue
recognition principle provides guidance on when to record revenue while matching concept
tells us how to reach an accurate net income figure by creating 1-1 correspondence between
revenues and expenses.

Revenue Recognition Principle

Revenue recognition principle tells that revenue is to be recognized only when the rewards
and benefits associated with the items sold or service provided is transferred, where the
amount can be estimated reliability and when the amount is recoverable. Accrual basis of
accounting is used in recognizing revenue which tells that revenue is to be recognized
ignoring when the cash inflows occur. Some of examples, a telecommunication company
sells talk time through scratch cards. No revenue is recognized when the scratch card is sold,
but it is recognized when the subscriber makes a call and consumes the talk time. A monthly

magazine receives 1,000 subscriptions of $240 to be paid at the beginning of the year. Each
month it recognizes revenue worth $20,000 [($240 12) 1,000].

Full Disclosure Principle

Full disclosure principle is relevant to materiality concept. It requires that all material
information has to be disclosed in the financial statements either on the face of the financial
statements or in the notes to the financial statements. Examples, accounting policies need to
be disclosed because they help understand the basis of accounting. Details of contingent
liabilities, contingent assets, legal proceedings, etc. are also relevant to the decision making
of users and hence need to be disclosed. Significant events occurring after the date of the
financial statements but before the issue of financial statements (i.e. events after the balance
sheet date) need to be disclosed.

Historical Cost Concept

Accounting is concerned with past events and it requires consistency and comparability that
is why it requires the accounting transactions to be recorded at their historical costs. This is
called historical cost concept. Historical cost is the value of a resource given up or a liability
incurred to acquire an asset/service at the time when the resource was given up or the liability
incurred. In subsequent periods when there is appreciation is value, the value is not
recognized as an increase in assets value except where allowed or required by accounting
standards. Examples, 100 units of an item were purchased one month back for $10 per unit.
The price today is $11 per unit. The inventory shall appear on balance sheet at $1,000 and not
at $1,100. The company built its ERP in 2008 at a cost of $40 million. In 2010 it is estimated

that the present value of the future benefits attributable to the ERP is $1 billion. The ERP
shall stand on balance sheet at its historical costs less accumulated depreciation.

Matching Principle
In order to reach accurate net income figure, the expenses incurred to earn the revenues
recognized during the accounting period should be recognized in that time period and not in
the next or previous. This is called matching principle of accounting. Examples, $2,000,000
worth of sales are made in 2010. Total purchases of inventory were $1,000,000 of which
$100,000 remained on hand at the end of 2010. The cost of earnings is $2,000,000 revenue is
$900,000 [$1,000,000 minus $100,000] and this should be recognized in 2010 thereby
yielding a gross profit of $1,100,000.

Relevance and Reliability

Relevance and reliability are two of the four key qualitative characteristics of financial
accounting information. The others being understand ability and comparability. Relevance
requires that the financial accounting information should be such that the users need it and it
is expected to affect their decisions. Reliability requires that the information should be
accurate and true and fair. Relevance and reliability are both critical for the quality of the
financial information, but both are related such that an emphasis on one will hurt the other
and vice versa. Hence, we have to trade-off between them. Accounting information is
relevant when it is provided in time, but at early stages information is uncertain and hence
less reliable. But if we wait to gain while the information gains reliability, its relevance is

lost. An example, after the balance sheet date but before the date of issue a company wants to
dispose of one of its subsidiaries and is in final stages of reaching a deal but the outcome is
still uncertain. If the company waits they are expected to find more reliable information but
that would cost them relevance. The information would be out-dated and no longer very
relevant.

Substance over Form

While accounting for business transactions and other events, we measure and report the
economic impact of an event instead of its legal form. This is called substance over form
principle. Substance over form is critical for reliable financial reporting. It is particularly
relevant in case of revenue recognition, sale and purchase agreements, etc. Example, a lease
might not transfer ownership to the leasee but the leasee has to record the leased items as an
asset if it intends to use it for major portion of its useful life or where the present value of
lease payment is fairly equal to the fair value of the asset, etc. Although legally the leasee is
not the owner, so the leased item is not his asset, but from the perspective of the underlying
economics the leasee is entitled to the benefits embedded in the use of the item and hence it
has to be recorded as an asset.

Prudence Concept
Accounting transactions and other events are sometimes uncertain but in order to be relevant
we have to report them in time. We have to make estimates requiring judgment to counter the
uncertainty. While making judgment we need to be cautious and prudent. Prudence is a key
accounting principle which makes sure that assets and income are not overstated and

liabilities and expenses are not understated. For instance, bad debts are probable in many
businesses, so they create a special contra-account to accounts receivable called allowance
for bad debts which brings the accounts receivable balance to the amount which is expected
to be realized and hence prevents overstatement of assets. An expense called bad debts
expense is also booked to stop net income from being overstated.

Understandability Concept
Understandability is one of the four qualitative characteristics of financial accounting
information. The other being relevance, reliability, timeliness, faithful representation,
comparability and materiality. Understandability refers to the quality of financial information
which makes it understandable by people with reasonable background knowledge of business
and economic activities. Understandability requires the information presented in financial
reports to be concise, complete and clear in presentation. The information should be
presented so as to facilitate the user of the information. However, understandability never
prescribes any complex information to be omitted altogether due to its underlying difficulty
in understanding. It just requires us to disclose the information systematically instead of
presenting it haphazardly. For instances, understandability would require the financial
statements to be identified by presenting the name of the financial statement, the name of the
entity and the period covered by the statement. Understandability also requires the notes to be
properly numbered and cross-referred to the original balance sheet and income statement
items. For example the note number of disclosure on leases should be mentioned in front of
the lease payable line item appearing on the face of a balance sheet.

Comparability Principle
Comparability is one of the key qualities which accounting information must possess.
Accounting information is comparable when accounting standards and policies are applied
consistently from one period to another and from one region to another. The characteristic of
comparability of financial statements is important because it allows us to compare a set of
financial statements with those of prior periods and those of other companies. For an
example, we can compare 20X2 financial statements of ExxonMobil with its 20X1 financial
statements to know whether performance and position improved or deteriorated.

Consistency Concept
The concept of consistency means that accounting methods once adopted must be applied
consistently in future. Also same methods and techniques must be used for similar situations.
It implies that a business must refrain from changing its accounting policy unless on
reasonable grounds. If for any valid reasons the accounting policy is changed, a business
must disclose the nature of change, the reasons for the change and its effects on the items of
financial statements. Consistency concept is important because of the need for comparability,
that is, it enables investors and other users of financial statements to easily and correctly
compare the financial statements of a company. An example, company A has been
using declining balance depreciation method for its IT equipment. According to consistency
concept it should continue to use declining balance depreciation method in respect of its IT
equipment in the following periods. If the company wants to change it to another depreciation
method, say for example the straight line method, it must provide in its financial report, the
reason(s) for the change, and the nature of the change and the effects of the change on items
such as accumulated depreciation.