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Infonet College
ACCOUNTS AND BUDGET SUPPORT LEVEL IV
Learning Guide
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INTRODUCTION
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o Read and make sure to Practice the activities in the Operation Sheets.
Ask your trainer to show you the correct way to do things or talk to
more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.
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Objectives
of
Financial accounting
Qualitative Elements
Characteristics of financial
of accounting statements
Information
Recognition and
Measurement guide lines
Conceptual Framework
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Objectives of financial reporting relate to the type of information that is helpful far
external users in investment and credit decision making. The major interest being
"who needs, what kind of information and for what purposes"
In response eight objective of financial reporting are identified enlisted from more
general to specific as follows:
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Secondary qualities
The usefulness of information enhance when the secondary qualities are
achieved in addition to the primary qualities indicated. The secondary qualities
compose comparability and consistency.
A. Comparability
This involves the quality of information being compared with similar
information about another enterprise. This is inter-company comparison that
enables user to identify and explain similarities and differences between
enterprises. It also enable to identify favorable and unfavorable trends
happening in a given enterprise over periods.
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B. Consistency
This is the feature of information being compared across periods about the same
enterprise. This deals with inter-company comparison. Accounting information
will be consistent if accounting policies and procedures remain unchanged and
confirm from period to period. However, change in accounting methods may be
desirable due to change in the economic condition or issuance of new preferable
accounting methods.
Comparability and consistency are very much independent each other as
consistency are an important condition that enhances comparability across
periods. That is financial information to be comparable; accounting methods
should be applied consistently from period to period.
Cost-effectiveness-pervasive constraints
This is a pervasive constraint affecting all informational qualities. For
information to be considered, It should be ensured that the benefits to be
achieved from using the information should exceed the cost of obtaining the
information given if the information meets all the qualitative characters tics
mentioned.
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Equity:- is the residual interest in the assets of an entity that remains after
deducting its abilities. In business enterprises, the equity is the ownership interest.
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services, or carrying out other activities that constitute the entity's on going major
or central operations.
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Normally, it is assumed that assets will be used in the future operations of the
business and allocated as expense (as depreciation and amortization for instance)
only when consumed. Thus, no need arises to express them in terms of their
current market values.
C. Monetary Unit Assumption
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A. Objective Principle
Data entered into the accounting records and later reported on the financial
statements must be supported by objectively determinable evidence.
B. Historical cost principle
This deals with when revenues should be recognized and, thus, determining the
critical event that indicates revenue is realized and justifies recoding the changes in
net assets. Revenue is recognized when it is realizable or realization and earned.
Both features should be met before
Realization of revenue
Revenues are realized when products (goods or services), merchandize, or other
assets are exchanged for cash or claims to cash. Revenuers are realizable when
assets received or held are readily convertible when they are salable of
interchangeable in a market at readily determinable prices with significant
additional cost.
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Earning of Revenue
Revenue is said to be earned when the seller substantially accomplishes its
performance or obligations that would entitle the seller to the benefits represented
by the revenues.
Revenue realization principle is related with valuation principle for the case it
suggests that assets (such as inventory) should be carried at their historical cost
until appreciation in value in realized through sales. After realization, valuations of
monetary assets received in exchange for productive assets approximate their
current fair values.
D. Matching Principle
In an attempt to measure the periodic income properly, appropriate recognition of
revenues and exposes should be made. Thus, after revenue for a given period is
determined in the line with revenue recognition principle, the next crucial point
follows to be when expenses should be recognized. This indicates that expense
recognition is closely tied to revenue recognition.
The matching principle states cost should be recognized as expenses when the
goods or services represented by the cost actually make contribution to revenue:
dictating, “let the expense follow revenues”. The basic for this being creating cause
and effect association of accomplishments achieved (revenue) and efforts
expended (expenses). This addresses the "issue" what caused the revenues
generated (the effect)? This is referred as direct matching that involves associating
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expenses with revenues on the basis of a presumed causes and effect relationship
some expenses recognized under this approach include:
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E. Accrual principles
Revenue should be recorded when earned regardless of collection of cash.
Expenses should be recorded when incurred or when assets are consumed
regardless of payment of cash. In short, revenues or expenses are recognized at a
time earned or incurred.
F. Disclosure Principle
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Significant subsequent events that occur after the balance sheet date until
financial statements are issued.
Disclosures in the notes to the financial statements should supplement or explain
the information in the body of the financial statements. They shouldn't be used as
correction to the improper information presented or information omitted in the
body of the statement.
Schedules present detailed computations of figures presented in the financial
statements such as inventory, receivables, payables, operating expense, etc.
Supplementary information communicates matters such as:
Details or amounts that present a different perspective from that adopted in
the financial statements; such as financial statements adjusted for the effects
of inflation;
Management's explanation of the financial information and its discussion of
the significant of that information
The disclosure principle doesn't require listing all available information. Further,
precision (reporting exact dollar amounts) is not necessarily expected. Rather only
significant items to influence the decision of information users are disclosed and
approximation of figures is possible
The primary qualitative characteristics (relevance and reliability) are important
features to consider in deciding whether to disclose a given item or not.
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Materiality
An item is considered to be material, if, in the light of surrounding circumstances,
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the magnitude of the item omitted or misstated in financial reporting is such that
the judgment of a reasonable person relying upon the report would have been
changed or influenced by the inclusion or correction of the item.
To the contrary, an item is considered as immaterial if its omission have no impact
on decision makers.
Thus, the constraint of materiality applies in manner that diversion from pre-set
accounting theories or principles is "Owed if the item is considered to be
immaterial; while the accounting principle is strictly applied if the amount is
determined to be material.
Two factors should be considered in deciding whether a given item is material
(deserving strict application of the GAAPs) or immaterial (that diversion from the
GAAPs is possible):
Relative size of the item. This is consideration for the quantitative nature by
observing the relationship between the item and key financial variables such
as asset, liability, owner's equity, revenue, expense, net income, etc. Thus,
an item determined to be material for a given firm may be immaterial for
another with larger magnitude of the financial variables mentioned.
Basic nature of the item. This is qualitative consideration such as contractual
violation or representation of illegal acts of certain transactions
However, it is not always possible to put a clear line in demarcating an item is
either material or immaterial in a tangible manner. Thus, the concept of materiality
requires exercising judgment and professional expertise of individuals.
Industry Practices
This involves modifications of accounting principles necessitated by the unusual
characteristics of some industries. These modifications are part of the GAAP as
they enhance the usefulness o~ information provided given the peculiar nature of
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Self Test
1. What is the most important qualitative chrematistic of accounting
information according to the financial Accounting standards Board?
2. Are generally accepted accounting principles applicable to both financial
accounting and Managerial accounting? Explain.
3. What is comprehensive income as defined by the financial Accounting
standards Board?
4. Define the revenue realization principle.
5. What meant by the continuity or going-concern principle of accounting?
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