Basic Underlying Accounting Principles

    

Revenue Recognition Persuasive evidence of an arrangement exists. Delivery has occurred or services have been rendered The seller’s price to the buyer is fixed Collectibility is reasonably assured

Basic Underlying Accounting Principles
 The

Matching Concept  Requires that revenue and expenses related to generating the corresponding revenue be recorded in the same period.  As a sale is made, the appropriate charges for COGS or other expenses should be consistent from one accounting period to the next.

Basic Underlying Accounting Principles
Historical Cost Is the proper basis for the recording of assets, expenses, equity, etc.  Full Disclosure The financial statements of a firm must include all information necessary for the formation of valid decisions by the users.

Basic Underlying Accounting Principles
 Consistency  Firms

must employ consistent accounting procedures from period to period.  Variations or changes in accounting policy and procedures must be justifiable.  Standards used to value inventory, depreciate assets, or accrue expenses must be consistent from one accounting period to the next.

Basic Underlying Accounting Principles
 Objectivity  Accounting

records must be designed and kept on objective rather than subjective evidence.  Underlying verifiability must exist for the information contained in the financials.  The historical cost must be verifiable through legitimate proof of purchase.

Basic Underlying Accounting Principles
 Separate  Economic

Entity Assumption

activity of an entity must be kept separate from other personal or business entities

Basic Underlying Accounting Principles
 Going

Concern – Continuity Assumption  There is an assumption that the life of an entity will be long enough to fulfill its financial and legal obligations.  Any evidence to the contrary must be reported in the financial statements of an entity.

Basic Underlying Accounting Principles
 Unit

of Measure  All financial reports are based on the monetary unit of the firm’s home country.  Adjustments for inflationary trends are not shown in the financial statements of the entity.

Basic Underlying Accounting Principles
 Periodicity

– Time Period Assumption  The life of an entity is divided into short economic time periods on which reporting statements are fashioned

Departures from GAAP Modifying Conventions
Variations from GAAP are sometimes required. The following modifying conventions give guidance and must be considered when departing from what is generally acceptable.

Modifying Conventions
 Conservatism  When

considering an accounting matter in which there are two alternatives that equally satisfy conceptual and implementation principles for a transaction the accountant must take the conservative approach, and follow the alternative that will have the least favorable impact on the net income of the entity.

Modifying Conventions
 Industry

Practices & Peculiarities The peculiarities and practices of an industry (such as banking, investment, insurance etc) May warrant selective exceptions to accounting principles . Some differences in Accounting also occur in response to legal requirements.

Modifying Conventions
 Substance

over form The economic substance of a transaction determines the accounting treatment , even when the legal aspects of the transaction indicate otherwise. Example : lease contract

Modifying Conventions
 Application

of Judgment An accountant may depart from GAAP if the results of departure appear reasonable under the circumstances, especially when the strict adherence to GAAP will produce unreasonable results.

Modifying Conventions
 Materiality

The amount of an item is material if its omission would affect the judgment of a Reasonable person who is relying on the financial statements.

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