Accounting concepts by Ibrahim Vishal

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Accounting Concepts

By: IBRAHIM VISHAL

Introduction Actually there are a number of accounting

concepts and principles based on which we prepare our accounts

These generally accepted accounting principles lay down accepted assumptions and guidelines and are commonly referred to as accounting concepts

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Accounting Concepts Business entity Money Measurement/stable monetary unit Going Concern Historical Cost Prudence/conservatism Materiality Objectivity Consistency Accruals/matching Realization Uniformity Disclosure Relevance

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Prudence/Conservatism

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Meaning Revenues and profits are not anticipated.

Only realized profits with reasonable certainty are recognized in the profit and loss account

However, provision is made for all known expenses and losses whether the amount is known for certain or just an estimation

This treatment minimizes the reported profits and the valuation of assets

We have to make estimates requiring judgment to counter the uncertainty.

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Prudence/Conservati

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Example 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.

Some liabilities are contingent upon future occurrence or non-occurrence of an event such a law suit, etc. We judge the probability of occurrence of that event and if it is more than 50% we record a liability and corresponding expense at the most likely amount. Hence, we stop liability and expense from being understated.

Prudence/Conservati

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Example Stock valuation sticks to rule of the lower of cost

and net realizable value Periodic evaluations of assets are made to make

sure their carrying value does not exceed the benefits expected to be derived from the asset, and if it does exceed, the impariment of fixed asset is recorded by reducing its carrying amount.

The provision for doubtful debts should be made Fixed assets must be depreciated over their

useful economic lives

Prudence/Conservati

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Materiality

Meaning Financial statements are prepared to help

the users with their decisions. Hence, all such information which has the ability to affect the decisions of the users of financial statements is material and this property of information is called materiality.

Immaterial amounts may be aggregated with the amounts of a similar nature or function and need not be presented separately

Materiality depends on the size and nature of the item

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Materiality

Example The government of the country in which the

company operates in working on a new legislation which would seriously impair the company's operations in future. Although there are no figures involved but the impact is so large that disclosure is imminent.

The cost of small-valued assets such as pencil sharpeners and paper clips should be written off to the profit and loss account as revenue expenditures, although they can last for more than one accounting period

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Materiality

Example The remuneration paid to the

executives and the directors is material. The accounting policies are material

because they help the users understand the figures.

Small payments such as postage, stationery and cleaning expenses should not be disclosed separately. They should be grouped together as sundry expenses

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Materiality

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