Unit 6 - Accounting Concepts Standards-1
Unit 6 - Accounting Concepts Standards-1
Unit 6 - Accounting Concepts Standards-1
ACCOUNTING CONCEPTS
&
PRINCIPLES
Introduction
The accounting concepts act as a guide to the ‘proper’ way of
recording and presenting accounting transactions and
statements.
These standards have evolved over time and are gradually being more
closely integrated into a common set of international standards.
Some countries still operate under their own GAAP rules and regulations.
Principles, Assumptions, and Concepts of Accounting
The Financial Accounting Standards Board (FASB) is an independent,
nonprofit organization that sets the standards for financial accounting and
reporting, including generally accepted accounting principles (GAAP), for both
public- and private-sector businesses.
GAAP are the concepts, standards, and rules that guide the preparation and
presentation of financial statements. International accounting rules are called
International Financial Reporting Standards (IFRS).
Publicly traded companies (those that offer their shares for sale on exchanges in
the United States) have the reporting of their financial operations regulated by the
Securities and Exchange Commission (SEC).
Financial statements - The underlying principles
The Framework for the preparation and presentation of Financial
Statements was issued by the IASB.
1. Understandability;
2. Relevance;
3. Reliability and
4. Comparability.
1. Understandability
Financial statements should be accessible enough to be understood by
the users of the information. The framework sets out the main users of
the financial statements as follows;
● Investors
● Employees
● Lenders
● Suppliers
● Customers
● Government
● The public.
Accounting underlying principles
2. Relevance
Financial statements should provide relevant information.
3. Reliability
Financial statements must reliably show the effects of financial
transactions on the firm’s financial position.
Accounting underlying principles
4. Comparability
The financial statements must be prepared in such a manner as
to ensure that comparisons can be made with earlier time
periods.
The prudence concept links with the requirement of reliability for the
financial statements. This concept is sometimes known as
conservatism.
Accounting concepts cont’d
2. Prudence continued......
Once an asset is recorded in the books, the value of that asset must
remain at its historical cost, even if its value in the market changes.
2. FULL DISCLOSURE PRINCIPLE
States that a business must report any and all business activities that
could affect what is reported on the financial statements.
The financial statements must only show the true business expenses.
Any use of business resources for private matters should be recorded in
the accounts as drawings.
Accounting assumptions
2. Going concern
The assumption is made that the business will continue trading into the
future, and that the business and its assets are not expected to be sold
off in the near future.