Accounting principles and concepts
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Transcript of Accounting principles and concepts
ACCOUNTING CONCEPTS,
CONVENTIONS AND
PRINCIPLES By Habibu Ayuba, BSc; PGDE, MSc; ACA inview.
08030527135
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 1
Aim and objectives the
presentation
At the end of the sessions, the participants should be able to:
To understand accounting and reporting policies.
To define accounting concepts and convention.
To explain factors to be considered in selecting an appropriate accounting policies.
To examine changes in accounting policies.
To state the disclosure requirement of accounting policies.
To discuss the impact of accounting policies on the recognition of asset and liability..
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 2
Understanding of Accounting
and Reporting policies
Imagine that you are a business owner and you take
copies of your financial records (books) to six different
accountants, you ask each one to calculate your profit
for the year. A fortnight later they each provide you
with their answers. There are six different profit
figures, with very wide variations between them.
What would you do?
Why do accountants give you six (6) different profits
figure?
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 3
Then what will be your impression
about the accounting profession.
To avoid this kind of situations. We
need to know why things are like that
in accounting.
Various rules or accepted ways of
going about things have evolved in
accounting profession. These things
are like rules of the game and are
known as “Concepts and Conventions”4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 4
Therefore to make the accounting language capable of
conveying similar and the same meaning to all its stake
holders, concepts, methods and policies of preparing
financial accounting statements are coined.
To make it more meaningful, accountants have agreed
on a number of concepts which are usually followed for
preparing the financial statements and are now
internationally recognized as international reporting
standard (IFRS).
These concepts provide a foundation for accounting
process. No enterprise can prepare its financial
statements without considering these concepts.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 5
Accounting and reporting
policies
Reporting policies consists of the interplay of the
following:
Accounting policies
Accounting concepts
Accounting methods
Accounting bases
Accounting assumptions
Accounting conventions
• These terms are what are referred to as accounting
concepts and convention.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 6
Accounting policies
Accounting policy of a giving company is simply means all those specificaccounting concepts, accounting methods and accounting bases whichare adopted by the entity in the presentation of its financialstatements.
A complete set of financial statements comprises according to IFRS isthe following:
■ Statement of Financial Position (formerly Balance Sheet);
■ Statement of Comprehensive Income (formerly Income Statement);
■ Statement of changes in equity;
■ Statement of cash flows;
■ Notes to the financial statements that contain accounting policies andother explanatory -information; and
■ Statement of financial position for the beginning of the earliestcomparative period when an entity applies an accounting policyretrospectively, makes a retrospective restatement of items in itsfinancial statements, or reclassifies items in its financial statements
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 7
Financial Statements
According to CAMA, 1990
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 8
Accounting concepts
Accounting concepts are defined as a those fundamentalassumptions or postulates that underlie the preparation andpresentation of financial statements.
They are as follows:
Going concern concept
Legal entity concept
Periodicity concept
Realization concept
Matching/Accrual concept
Historical cost concept
Consistency concept
Dual concept
Monetary measurement concept (quantitative)
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 9
Going concern concepts
It states that a company would operate
(never die or stop) for a foreseeable long
future.
In this concept, it is assumed that the
business will continue to be in operation
for an indefinite period of time. If the
business were going to be sold, then it
would be necessary to know how much
the assets will fetch.
4/8/201
4By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 10
Legal/Business entity
concept
It states that a modern business is always
separate, distinct and independent of its
owners/shareholders/ managers/directors.
This concept state that a business is an entity
(perceived to have its own existence) separate
from its owner. Therefore business record should
be separated and kept distinct from the personal
record of the business owner . At time law makes
the same distinction, as in the case of limited
company which is a separate legal entity from the
shareholders or its Directors.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 11
Periodicity concept
It states that in every financial accounting
records kept and prepared, there must
have a time for its reporting. The time
accepted for the report is the period of
12 months.
The results of the business must be
prepared in a shorter interval not to be
allowed until its final liquidation. That is
why business is divided into accounting
period.4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 12
Realization concept It states that rule for recognizing the revenue of the business.
Periodic recognition of revenue is made as soon as: it is capable ofobjective measurement and the value of assets received or receivable inthe exchange is reasonably certain.
In accounting; profit is normally regarded as being earned at the timewhen the goods or services are passed to the customers and he incursliabilities for them.
Revenue is recognized at a variety of time but four (4) instances areprominent which are:
1. At the time of sale of asset
2. During production of asset
3. At the completion of the production of asset
4. At a point of cash collection.
The choice of the time usually is more of industrial norms.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 13
MONEY MEASUREMENT It states that every item in accounts should be
measureable in monetary terms such as Naira,Dollar etc.
In this concept, accounting is only concernedwith items that can be quantified in monetaryterms. That is a business may have valuableresource like workforce skill, morale, marketleadership, brand recognition, qualifymanagement but these do not get recorded inthe financial statement because they can notbe quantified in monetary terms.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 14
THE HISTORICAL COST CONCEPT
It states that the purchasing price as a cost of an
asset/liability is the appropriate basis for the
initial accounting recognition of an asset acquired;
services rendered; expenses incurred; creditors
and owners interest. It should be retained through
out accounting process.
This requires that assets of a business be recorded
in the ledger account at the actual price paid to
acquire them. This means asset be recorded at
their original price of acquiring them. This cost
serves the basis for further accounting treatment
of the asset.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 15
THE DUAL ASPECT CONCEPT
It states that every Debit (receive) Entry musthave a correspondent Credit (give) Entry, viceversa.
This principle states that there are two aspect ofaccounting. One represented by the assets ofthe business and the other by the claims againstthem . This is based on the accounting equation:-Asset = Liabilities + Owners Equity. alltransactions recorded in the account must keepthis equation in balance. To do this financialtransaction are allocated to both a debit sideand credit side of equal amounts.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 16
THE ACCRUAL/MATCHING CONCEPT
It states that the profit of the business shouldbe recorded at a point of sale irrespective ofwhether cash is due or in arrears as theexpenses related to it is simultaneouslyrecognized when incurred not necessarilywhen cash is paid.
The principle states that the income and costaccruing to the owner of a business is notnecessarily the amount of cash actuallyreceived in a period of account. That isrevenue and costs are recorded when theyoccur rather than when the cash is receivedor paid.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 17
Accounting Methods
They are ways or media through which a the
accounting concepts are applied in the
preparation and presentation of financial
statement.
Examples are:
1. Straight line/reducing methods of depreciating
assets.
2. Closing rate/ temporal method for translating.
3. Completed contract methods or percentage of
completion method and so on.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 18
Accounting Bases
These are totality of accounting methods that are
employed in the preparation and presentation of
financial statement.
Generally, accounting methods are grouped into:
Cash Basis: states that all business transactions
are recognized only when the actual cash is paid
or received by the entity.
Accrual Basis: states that all business transactions
are recognized whether the cash has been
received or not.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 19
Contents of accounting
policy
Items to be included in the accounting policies of a givencompany are:
1. General accounting policies
2. Policies on measuring fixed assets
3. Policies on stock or work in progress valuation
4. Policies of depreciating assets and depreciation methods
5. Policies on investment
6. Policies on lease
7. Policies on research and development
8. Policies on franchises
9. Policies on employee retirement methods
10. Policies on consolidation etc.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 20
Accounting Assumptions
These are the beliefs of which preparation and
presentation of financial statement is built upon.
In accounting, there are two assumptions:
Stability: a belief that the monetary units which is
the basis of valuation and measurement of all
transaction remain the same over a foreseeable
future period of time.
continuity: A going concern which share the belief
that the business entity will survive and continue
operation in a foreseeable future.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 21
THE ACCOUNTING CONVENTIONS
The accounting conventions can beinterpreted in many ways. What weretherefore grown up in accounting aregenerally accepted approaches to theapplication of the concepts. Theseapproaches are known as the conventions ofaccounting ( Regulation). The mainconventions are:-
- Materiality
- Conservatism/prudence
- Consistency
- objectivity
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 22
MATERIALITY CONVENTION
It states that a financial statement should present and
report all items of transaction which are capable of
influencing the decision of stakeholders and if such
items omission completely or wrongly stated would
significantly alter the stakeholders’ decision.
This is a convention that records any thing that are
significant enough to justify the usefulness of the
information. Only items that are deemed significant for
a given size of operation should be recorded.
Accountants are guided to ignore insignificant details
otherwise the account will be burdened down with
minute details. Therefore materiality is an issuer of
judgment.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 23
CONSERVATISM/PRUDENCE
CONVENTION
It states that a financial statements report and
recognize instantly and adequately known loses and
gains/profit is ignored until its full realization is
certain.
Very often an accountant has to make a choice as to
which figure he will take for a given item.
Conservatism means that the accountant will take the
figure, which will understate rather than overstate the
profit. All anticipated losses should be recorded but all
anticipated gains should be ignored.
Therefore provisions is made for all losses even though
the amount can not be determined with certainty.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 24
CONSISTENCY CONVENTION
It states that the financial statements shouldbe prepared in a way that a similar items oftransactions are treated equally and similarlyso as to maintain uniform presentation formatadoptable over a time.
The concept and convention already listedare so broad that in fact there are manydifferent ways in which items may berecorded in the accounts.
By this assumption, accountants are expectedto record and report accounting activities inthe same way year by year if any sensible andmeaningful comparison would be made tofinancial report of a firm for differentperiods. Having a particular method wouldgive the firm the most equitable picture ofthe activities of the business.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 25
OBJECTIVITY CONVENTION
It states that preparation andpresentation of financialstatements should be made freefrom the accountants/ preparersbias, undue influence andconflict of interest.
All items of transactions reportedare supported by thedocumentary evidence andfacts..
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 26
Factors to Consider when
Choosing Accounting policies
Some concepts, methods and bases conflict with one
another. Thus, judgment is required to select the good
relevant policies for your financial statement so as to
ensure true and fair view of the reporting. These factors
are as follows:
Fairness
Materiality
Substance over form
Objectivity
prudence
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 27
Disclosure Requirement of Accounting
policies
IFRS-IAS/SAS 1 states that allaccounting policies of areported entity should bedisclosed together under onecaption rather than as notesto the individual items in thefinancial statement.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 28
Changes in the Accounting
Policies
Consistency is required to be applied in financial
reporting, yet, instances may warrant changes of
accounting policies.
The circumstances giving rise to changes are:
Where the existing policies no longer ensure true and
fair view of the event.
Where there is a new accounting standard that
renders the existing policies invalid.
Where there in new legislation/ regulation that would
ensure a better presentation of true and fair view of
the account.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 29
ACCOUNTING PRINCIPLES
Accounting is guided by the following principles:
Substance over form
Objectivity
Fairness
Materiality
Prudence
Substance over form: states that substance/uses/economicreality of an item of transaction is always reported at theexpense of legal form.
Fairness: states that all stakeholders of accounting aretreated with equally without favoring a group at theexpense of another.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 30
Impact of Accounting Policies on
the recognition/measurements of
Assets and Liability
The value of assets and liabilities to be disclosed in the
financial statements are greatly affected by the policies
adopted.
Assets and Liabilities are subject to or exposed to these
methods of valuation as proposed by accounting
policies.
The methods include:
Historical cost methods
Realization value methods
Current value methods
Replacement cost methods
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 31
Impact of policies Cont….
Historical cost value assets and liability based on theactual cost of the assets acquired or the liabilityincurred.
Realization value method value assets and liabilitybased on what the assets/liabilities could fetch at thepoint of disposal after removing disposal expenses.
Current value method value assets/liability based onwhat a new brand one is being sold in the market at anarm length transaction. It is called fair value.
Replacement cost method value assets/liability basedon what, new but similar one would cost in the openmarket if acquired to replace the existingasset/liability.
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 32
ACCOUNTING BOOKS
There are various forms of accounting books depending on what the book is used for. The main books of accounting and financial statement known are:
a) Cash register
b) Cash book
c) Petty cash book
d) General ledger
e) Trading, profit and loss account
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 33
f) Trial balance
g) Balance sheet
h) Bank reconciliation statement
The following are the subsidiary books of
account:
a) Purchases day book
b) Sales day book
c) Purchases return day book
d) Sales return day book4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 34
THANK YOU FOR YOUR PRESENCE
4/8/2014By Habibu Ayuba, BSc; PGDE, MSc; ACA inview. 08030527135 35