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Friday, December 17, 2010

Fundamental Accounting Concepts

Disclose of accounting policies refers to four basic assumptions underlying the periodic financial statements of enterprises. The turn used to describe these broad assumptions is fundamental accounting concepts.
  • Going concern concept
    This assumption that the enterprises will continue in operational existence for the foreseeable future. This means that there is no intention or necessary either to liquidate the entity or to curtail significantly its activities.
  • Accruals concept
    Revenue is included in accounts when earned rather than when money is received. Costs are included when incurred rather than when paid. Revenues dealt with in the profit and loss account are then matched with associated costs in order to determined profit.
    Should the accruals concept conflict with the prudence concept, the prudence concept prevails.
  • Consistency concept
    This assumes consistency of treatment of similar items within a particular accounting period as well as from one period to the next.
  • Prudence concept
    Revenues and profits are not anticipated. They are recognized in the profit and loss account only when realized either in the form of cash or of other assets. Whose cash realization can be determined with reasonable certainty?
    Provision should be made for all known liabilities whether the amount of these is known with certainty or is a best estimate in the light of the information available.
    If financial statements are not drawn up on the basis of the above assumptions, the facts should be disclosed.

Future Assumptions and Principles

These are including:

  • Entity assumptions
    This assumes that for accounting measurement purposes, the business is regarded as a separate entity quite apart from its owners or proprietors. A business is regard as owning the resources which it uses and as owing the claims against those assets. The assets and liability of the business are kept completely separate those relating to the owners.
  • Money measurement assumptions
    This assumes that all assets liabilities and transitions can be quantified in monetary terms.
  • Stable standard of measurement assumption
    Following on from, historical cost accounting assumes that transactions occurring over a period of time can be measured in terms of a single stable measuring unit $ dollars. The obvious weaknesses of this assumption lad to calls for some form of system of accounting for price changes
  • Objectivity principle
    This principle requires accounting to be carried out on an objective and factual basis. However, subjective opinions and estimates play an important part in historical cost accounting. Example of subjectivity includes estimate lives of fixed assets and net realizable value of stock items.
  • Dual aspect principle
    Every change in one element of an entity (assets, liabilities, equity) is accompanied by another change of a similar amount, but in an opposite direction. This principle underlies the basis of double-entry book-keeping.
  • Substance over form
    Transactions should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form.


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