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    P.O.A Ka Lecture 2

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    king heart
    Accounting principles are the rules and guidelines that companies must follow when reporting financial data. Some key principles include: [1] the accrual concept, which requires recording revenues when earned and expenses when incurred, rather than when cash is received or paid; [2] the going concern concept, which assumes a company will continue operating; and [3] the matching principle, which requires expenses be matched to the revenues of the period. Other principles covered include the business entity, historical cost, materiality, prudence, time period, revenue recognition, and conservatism concepts.

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    P.O.A Ka Lecture 2

    Uploaded by

    king heart
    68 views16 pages
    Accounting principles are the rules and guidelines that companies must follow when reporting financial data. Some key principles include: [1] the accrual concept, which requires recording revenues when earned and expenses when incurred, rather than when cash is received or paid; [2] the going concern concept, which assumes a company will continue operating; and [3] the matching principle, which requires expenses be matched to the revenues of the period. Other principles covered include the business entity, historical cost, materiality, prudence, time period, revenue recognition, and conservatism concepts.

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    P.O.A ka Lecture=2

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    Accounting principles are the rules and guidelines that companies must follow when reporting financial data. Some key principles include: [1] the accrual concept, which requires recording revenues when earned and expenses when incurred, rather than when cash is received or paid; [2] the going concern concept, which assumes a company will continue operating; and [3] the matching principle, which requires expenses be matched to the revenues of the period. Other principles covered include the business entity, historical cost, materiality, prudence, time period, revenue recognition, and conservatism concepts.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    68 views16 pages

    P.O.A Ka Lecture 2

    Uploaded by

    king heart
    Accounting principles are the rules and guidelines that companies must follow when reporting financial data. Some key principles include: [1] the accrual concept, which requires recording revenues when earned and expenses when incurred, rather than when cash is received or paid; [2] the going concern concept, which assumes a company will continue operating; and [3] the matching principle, which requires expenses be matched to the revenues of the period. Other principles covered include the business entity, historical cost, materiality, prudence, time period, revenue recognition, and conservatism concepts.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 16

    Accounting Principles

    What are accounting


    principles?
     Accounting principles are the rules and guidelines
    that companies must follow when reporting
    financial data . A number of basic accounting
    principles have been developed through common
    usage. They form the basis upon which modern
    accounting is based. If every business organization
    has its own set of accounting practices, it would
    become almost impossible to understand and
    analyze the financial statements of different
    companies.
    1. Accrual Concept

     Accrual concept is the most fundamental principle of accounting


    which requires recording revenues when they are earned and not
    when they are received in cash, and recording expenses when they
    are incurred and not when they are paid in cash
     Example: An accounting firm obtained its office on rent and paid
    $120,000 on January 1 as annual rent. It does not record the payment
    as an expense because the building is not yet used. Instead it records
    the cash payment as prepaid rent (which is a current asset)

    Dr. Prepaid Rent

    Cr. Bank/Cash
     Cash basis is the opposite of Accrual basis!!!
    2. Going Concern Concept

     General purpose financial statements are prepared


    assuming that the company can and will continue
    its business in the foreseeable future. If the company
    is not expected to continue operations i.e. it is
    required (or reasonably expected) to wind up, its
    financial statements are prepared using break-up
    basis. Foreseeable future normally means at least
    one year.
    Contd…

     Example

     National Oil, Inc., a nationalized refinery is facing


    serious cash flows problems but the government of
    the country provided a guarantee to the refinery to
    help it out with all payments. (Going-Concern)
     A bank is in serious financial trouble and the
    government is not willing to bail it out. The Board of
    Directors has passed a resolution to liquidate it.
    3. Matching Principle

     It requires that a company must record expenses in


    the period in which the related revenues are earned.
    It is important to match expenses with revenues
    because net income, i.e. the net amount earned in a
    period, is calculated by subtracting expenses from
    revenues. If expenses are not properly recorded in
    the correct period, the net income for a particular
    period may be either understated or overstated. It
    requires recognition of revenues and expenses
    regardless of the actual receipt of cash from
    revenues and actual payment of cash for expenses.
    Contd…

     Example:

     Company B generates $2,000,000 in revenue in 2010. Total


    purchases of inventories were $1,000,000 of which $100,000
    remained on hand at the end of 2010. The cost of sales
    should be reflected in the income statement at $900,000
    [$1,000,000 minus $100,000]. The company’s gross profit for
    2010 should be $1,100,000 (=$2,000,000 minus $900,000). The
    main point is to subtract only that much expense in a
    particular period which is related to the revenues earned in
    that period. Since $100,000 worth of inventories are to be
    sold in next period, they should not be subtracted from
    revenue for the current period.
    4. 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.
     Example:

     A businessman has paid $ 10,000 utility bills from his


    business account. The bill amount included $3,000 for
    the bill of owner’s house. Thus, only $7,000 is
    included in expenses. $3,000 is withdrawals.
    5. 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. In subsequent periods when there is
    appreciation is value, the value is not recognized as an
    increase in assets value
     Example: 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
    6. Materiality

     Financial statements are prepared to help its users


    in making economic decisions. All such information
    which can be reasonably expected to affect
    economic decisions of the users of financial
    statements is material and this property of
    information is called materiality. Materiality is a key
    concept in accounting because it helps accountants
    and auditors in deciding which figures need
    separate reporting and what is the maximum
    amount above which errors or omissions should be
    avoided at all costs.
    Contd…

     Net income 0.5%

     Total assets 5%

     Revenue 10%
    7. Prudence

     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.
     Example: Account for “Bad-debts”
    8. 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.
     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.
    9. Revenue Recognition

     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.
     Example: 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.
    10. Conservatism concept

     Conservatism concept. Revenues are only


    recognized when there is a reasonable certainty that
    they will be realized, whereas expenses are
    recognized sooner, when there is a reasonable
    possibility that they will be incurred. This concept
    tends to result in more conservative financial
    statements.
    Thank You!

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