Archive about 'Basic Accounting Concepts and Regulatory Framework'

Dual Aspect Concept/Double Entry Methodology

DUAL ASPECT CONCEPT

This dual aspect concept is also called Double Entry Methodology

 

The key points are All transactions have two(2) dimensions

                                and
this follows from the basic accounting equation which is:

ASSETS= LIABILITIES + OWNERS’ EQUITY

Assets are the resources owned by a business
Liabilities are the rights of the creditors, which represent debts of the business
Owners Equity represents the [...]

Materiality Concept

MATERIALITY CONCEPT

Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements

Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size [...]

Historical Cost Concept

HISTORICAL COST CONCEPT

Assets, services recorded at price or sacrifice incurred to acquire them. This is called COST.

Changes in value of non-monetary assets ignored.

Exchange values are ignored

Historical cost is the term usually applied.

NOTES:

This concept basically does not encourage the use of current cost or replacement cost. Hence, it does not look into what the assets [...]

Going Concern Concept

GOING CONCERN CONCEPT

Business is continuing.

Resources will be used for the future.

Depreciation of fixed assets relies very heavily on this concept.

Liquidation applies to the balance sheet if failure is probable.

This concept assumes that the business entity will continue in business in the foreseeable future. As the intention is not to close its business, the company should [...]

Prudence Or Conservative Concept

PRUDENCE OR CONSERVATISM CONCEPT

· Recognize revenue only when they are reasonably certain
· Recognize expenses as soon as they are reasonably possible

NOTES:

This concept basically does not encourage the anticipation of recognizing income when it is not certain. It prefers that any expenses that can be reasonably ascertain should be taken up.

ILLUSTRATION

Company A has [...]

Consistency Concept

CONSISTENCY CONCEPT

·      Once a business has adopted on one accounting method, it should use the same method for all subsequent events of the same character unless it has sound reason to change

 NOTES:

This concept advocates that there must be consistent treatment for similar items within each accounting period and from one period to the next.

ILLUSTRATION NO.1

Company [...]

Business Entity Concept

BUSINESS ENTITY CONCEPT

·  Owner separate from the business

·  Company has a separate existence

·  Affairs of the owners separate from the business

NOTES:

By understanding this concept, we then realized that all the financial data will only be related directly to the activities of the business. The business is a separate “animal” by itself. It’s run by a [...]

Money Measurement Concept

MONEY MEASUREMENT CONCEPT

Only financial transactions are recorded

Non-financial data are ignored

Qualitative information are ignored

Money measure at the time of transaction, no allowance for changing price level

This concept ignores important economic information

By now, knowing this concept, you should realize that the financial statements will not generate qualitative, economic and non financial information. At times, this [...]