Lecture Two Cont

1
LECTURE 2
CONT.
E.YEBOAH(CA-GH;ACIB;F.CFIA;MIIAG) 2024-03-06
2 OUTLINE
 Accounting Concepts and Conventions

 Accounting Standards
 Accounting Policies
 Accounting Bases
3 Accounting Concepts
 Accounting Concepts define the assumptions on the basis of which financial statements of
a business entity are prepared.
 Concepts are those basic assumptions and condition which form the basis upon which the
accountancy has been laid.
4 Accounting Convention
 An accounting convention refers to common practices which are universally followed in

recording and presenting accounting information of the business entity.
 The accountants have to adopt the usage or customs, which are used as a guide in the
preparation of accounting reports and statements.
 These conventions are also known as doctrine.
5 Accounting Concepts/Examples
1. Business Entity Concept

2. Money Measurement Concept
3. Going Concern Concept
4. Periodicity Concept
5. Historical Cost Concept
6. Dual Aspect Concept
7. Matching Concept
8. Realisation Concept
9. Accrual Concept
6 Accounting Conventions/Examples
1. Consistency
2. Full Disclosure
3. Materiality
4. Conservatism
7 Business Entity Concept
 This concept assumes that, for accounting purposes, the business enterprise and its owners
are two separate independent entities.
 It should be noted that the entity assumption is not the same as legal entity.
 The importance of this assumption is that it enables the owner and other interested parties
to know the profits earned by, and the capital employed in, the business.
 The drawback is that this separate existence is artificial.
 The business entity is an empty shell since the resources held by it (assets) are owned by
the owner(s) and other claimants (liabilities), if any.
 At times, especially with sole proprietorships, some assets; for example, motor cars, are
both business and private assets.
8 Money Measurement Concept
 This concept assumes that all business transactions must be in terms of money, that is in
the currency of a country.
 But the transactions which cannot be expressed in monetary terms are not recorded in the
books of accounts. 
 For example, sincerity, loyalty are not recorded in books of accounts because these cannot
be measured in terms of money although they do affect the profits and losses of the
business concern.
9 Money Measurement Concept
 The importance of this assumption is obvious.

 Without it, it will be impossible to summarize the events of the financial year (income
statement) and the position of the business at the end of the year (balance sheet).
 The drawbacks of the money measurement concept are that:
1. Events and facts that cannot be expressed in terms of money are ignored.
2. Money, as a unit of measurement, is unstable; price levels change with inflation.
10 Going Concern Concept
 The assumption here is that the enterprise will continue in operational existence for the
foreseeable future.
 So the balance sheet and the income statement are drawn up on the assumption that there is
no intention or necessity to liquidate or curtail significantly the scale of operation.
 The significance of this assumption is clear. If the assumption were not to hold there would
be no sense to divide assets and liabilities into fixed and current.
 The drawback is that the assumption can be misleading. Because some firms do cease
operation not long after drawing accounts on the going concern basis. In other words, it is
not easy to tell from the final accounts whether the entity will fold up or really continue as
a going concern.
11 Periodicity Concept
 A business entity is assumed to have a long life (going concern).

 The periodicity concept build on the going concern concept and further assumed that the
long life of a business can be divided into shorter periods so that financial statements,
balance sheet and income statement can be produced at regular intervals.
 Management need information for the conduct of day-to-day operations, evaluation of
current operations, planning future operations and for control purposes. Other parties
interested in the business will also need frequent information for decision-making
purposes.
12 Periodicity Concept
 You may easily imagine the importance of this assumption.

 Businesses cannot wait indefinitely, till the end of their life, before profits are ascertained or
performance is assessed and tax obligations honoured.
 The drawbacks of the periodicity concept are that:
1. Not all business transactions can be identified with particular accounting period; in practice, many
transactions have consequences for many periods.
2. Periodic income determination becomes problematic and a range of principles has to be developed to
properly relate transactions to specific periods.
3. Arbitrary allocation and apportionment methods may be used.
13 Historical Cost Concept
 This accounting principle states that the assets and liabilities are entered into the books at their actual
cost to the business.
 The importance of the historical cost principle is that it provides the objectivity needed in recording
accounting transactions.
 If assets acquired or obligations incurred were to be measured at their current or realizable values,
subjectivity will set in and different measures will end up with different values for a given single
item.
 The drawback is that in times of changing price levels, serious distortion occurs with respect to values
of assets based on historical cost. The values of assets will therefore suffer from representational
faithfulness as the values will be far from their current values.
14 Dual Aspect Concept
 Dual aspect is the foundation or basic principle of accounting.

 It provides the very basis of recording business transactions in the books of accounts.
 This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in
their respective opposite sides.
 Therefore, the transaction should be recorded at two places.
 It means, both the aspects of the transaction must be recorded in the books of accounts.
 Thus, the duality concept is commonly expressed in terms of fundamental accounting
equation : Assets= Capital + Liabilities
15 Matching Concept
 The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period.
 So once the revenue is realized, the next step is to allocate it to the relevant accounting
period.
 This can be done with the help of accrual concept.
 If the revenue is more than the expenses, it is called profit.
 If the expenses are more than revenue it is called loss.
 This is what exactly has been done by applying the matching concept.
16 Matching Concept
 Therefore, the matching concept implies that all revenues earned during an accounting
year, whether received/not received during that year and all cost incurred, whether paid/not
paid during the year should be taken into account while ascertaining profit or loss for that
year.
 Significance
 It guides how the expenses should be matched with revenue for determining exact profit or
loss for a particular period.
 It is very helpful for the investors/shareholders to know the exact amount of profit or loss
of the business.
17 Realisation Concept
 This concept states that revenue from any business transaction should be included in the
accounting records only when it is realized.
 The term realization means creation of legal right to receive money.
 Selling goods is realization, receiving order is not.
 In other words, it can be said that : Revenue is said to have been realized when cash has
been received or right to receive cash on the sale of goods or services or both has been
created.
 The concept of realization states that revenue is realized at the time when goods or services
are actually delivered.
18 Realisation Concept
 Example:
 A company received an order to supply goods worth $10,000. The company supply goods
worth $7,500 up to the year ending 31st December, 2021 and suppled the rest of the goods
in January, 2022.
 The revenue for the year 2021 for the company is $7,500.
 Mere getting an order is not considered as revenue until the goods have been delivered.
19 Accrual Concept
 This concept assumes that revenues are recognised when they become receivable whether
cash is received or not; and expenses are recognised when they become payable whether
cash is paid or not.
 Revenues and expenses will be recorded in the accounting period to which they relate.
 Therefore, the accrual concept makes a distinction between the accrual receipt of cash and
the right to receive cash as regards revenue and actual payment of cash and obligation to
pay cash as regards expenses.
 The accrual concept under accounting assumes that revenue is realized at the time of sale
of goods or services irrespective of the fact when the cash is received.
20 Consistency Convention
 This means that same accounting principles should be used for preparing financial
statements year after year.
 A meaningful conclusion can be drawn from financial statements of the same enterprise
when there is comparison between them over a period of time.
 But this can be possible only when accounting policies and practices followed by the
enterprise are uniform and consistent over a period of time.
 If different accounting procedures and practices are used for preparing financial statements
of different years, then the result will not be comparable
21 Full Disclosure Convention
 This requires that all material and relevant facts concerning financial statements should be
fully disclosed.
 Full disclosure means that there should be full, fair and adequate disclosure of accounting
information.
 Adequate means sufficient set of information to be disclosed.
 Fair indicates an equitable treatment of users.
 Full refers to complete and detailed presentation of information.
 Thus, the convention of full disclosure suggests that every financial statement should fully
disclose all relevant information.
22 Full Disclosure Convention
 Let us relate it to the business.

 The business provides financial information to all interested parties like investors, lenders,
creditors, shareholders etc.
 The shareholder would like to know profitability of the firm while the creditor would like
to know the solvency of the business.
 In the same way, other parties would be interested in the financial information according to
their requirements.
 This is possible if financial statement discloses all relevant information in full, fair and
adequate manner.
23 Materiality Convention
 The convention of materiality states that, to make financial statements meaningful, only
material fact i.e. important and relevant information should be supplied to the users of
accounting information.
 The question that arises here is what is a material fact.
 The materiality of a fact depends on its nature and the amount involved.
 Material fact means the information of which will influence the decision of its user.
24 Convention of Conservatism
 This convention is also known as prudence.

 The convention is based on the principle that “Anticipate no profit, but provide for all
possible losses”.
 It provides guidance for recording transactions in the books of accounts.
 It is based on the policy of playing safe in regard to showing profit .
 The main objective of this convention is to show minimum profit.
 Profit should not be overstated.
 If profit shows more than actual, it may lead to distribution of dividend out of capital. This
is not a fair policy and it will lead to the reduction in the capital of the enterprise.
25 Convention of Conservatism
 Thus, this convention clearly states that profit should not be recorded until it is realized.
But if the business anticipates any loss in the near future provision should be made in the
books of accounts for the same.
 For example, valuing closing stock at cost or market price whichever is lower, creating
provision for doubtful debts, discount on debtors, writing off intangible assets like
goodwill, patent, etc.
 The convention of conservatism is a very useful tool in situation of uncertainty and doubts
26 Accounting Standards
 An accounting standard is a standardized guiding principle that determines the policies

and practices of financial accounting.
 Accounting standards not only improve the transparency of financial reporting but also
facilitates financial accountability.
 An accounting standard is relevant to a company’s financial reporting.
 Some common examples of accounting standards are segment reporting, goodwill
accounting, an allowable method for depreciation, business combination, lease
classification, a measure of outstanding share, and revenue recognition.
27 Accounting Standards
 The Generally Accepted Accounting Principles (GAAP) is the primary accounting standard
adopted by the U.S. Securities and Exchange Commission (SEC).
 GAAPs were designated in the United States and form the basis of accepted accounting
standards for preparing and reporting financial statements across the world.
28 International Financial Reporting Standards
(IFRS)
 International Financial Reporting Standards (IFRSs) are set by the International
Accounting Standards Board (IASB), which was established in 2001 to replace the
International Accounting Standards Committee (IASC).
 International Accounting Standards (IAS) was the name used for all the standards until the
end of 2002, and International Financial Reporting Standards(IFRS) has been used since
2003.
 Both standards are applicable until the time that the IASs have been replaced by the IFRSs.
29 IFRS
 In addition to the standards themselves, interpretations are issued in order to clarify certain
provisions of an original standard.
 Interpretations for IASs were developed by the Standing Interpretations Committee (SIC)
and those for IFRSs are developed by the International Financial Reporting Interpretations
Committee).
30 IFRS
 The standards are divided into four main parts:

1. definitions
2. measurement of the elements of financial statements
3. recognition of the elements of financial statements
4. disclosure requests
 For certain standards, an enterprise may choose from two treatments of a particular issue,
either a "benchmark" treatment or an "allowed alternative" treatment.
31 IFRS Vs GAAP
 The International Financial Reporting Standards (IFRS) and the Generally

Accepted Accounting Principles (GAAP) are accounting principles that provide
guidelines on how companies should prepare financial statements.
 GAAP is used in the U.S.A whilst IFRS is used by other countries.
 IFRS is more principles-based and, therefore, can better capture the economics
of a certain transaction.
 GAAP on the other hand, is a more rules-based approach.
32 Accounting Policies
 Accounting policies are rules and guidelines that are selected by a company for
use in preparing and presenting its financial statements.
 Accounting policies are important, as they set a framework, which all
companies follow, and provide comparable and consistent standard financial
statements across years and relative to other companies.
33 Accounting Policies
 Accounting policies can vary among different companies and geographies.

 However, most companies generally follow one of the two accounting
standards – the Generally Accepted Accounting Principles(GAAP) or the
International Financial Reporting Standards (IFRS).
 Accounting policies are different from accounting principles, as the principles
are the overarching accounting rules, whereas policies are the way a company
follows the rules.
34 Conservative vs Aggressive Policies
 Conservative accounting policies understate a company’s current financial

performance and show better financial performance in subsequent years. It is a
more sustainable approach and it allows companies to show improvement over
the years, which is a positive signal for investors.
 Aggressive policies tend to employ accounting policies in a way such that they
overstate the performance in earlier years, and it leads to a decline in a company’s
performance in later years (even though the company may be doing well).
 Aggressive accounting policies can also raise a red flag from auditors or investors if
they feel management is misrepresenting earnings or allocating costs.
35 Accounting Basis
 The basis of accounting refers to the methodology under which revenues and expenses are
recognized in the financial statements of a business. They are:
1. Cash Basis
2. Accrual Basis
3. Modified Cash Basis
36 Cash Basis
 Under the cash basis of accounting, a business recognizes revenue when cash is received,
and expenses when bills are paid.
 This is the easiest approach to recording transactions, and is widely used by smaller
businesses.
37 Accrual Basis
 Under the accrual basis of accounting, a business recognizes revenue when earned and
expenses when expenditures are consumed.
 This approach requires a greater knowledge of accounting, since accruals must be recorded
at regular intervals.
 If a business wants to have its financial statements audited, it must use the accrual basis of
accounting, since auditors will not pass judgment on financial statements prepared using
any other basis of accounting.
38 Modified Cash Basis
 A variation on these two approaches is the modified cash basis of accounting.

 This concept is most similar to the cash basis, except that longer-term assets are also
recorded with accruals, so that fixed assets and loans will appear on the balance sheet.
 This concept better represents the financial condition of a business than does the cash
basis of accounting.
39
THANK YOU
CONTACT: 0244271879/eddie.yeboah401@gmail.com

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 Accounting Concepts and Conventions

 An accounting convention refers to common practices which are universally followed in

1. Business Entity Concept

 The importance of this assumption is obvious.

 A business entity is assumed to have a long life (going concern).

 You may easily imagine the importance of this assumption.

 Dual aspect is the foundation or basic principle of accounting.

 Let us relate it to the business.

 This convention is also known as prudence.

 An accounting standard is a standardized guiding principle that determines the policies

 The standards are divided into four main parts:

 The International Financial Reporting Standards (IFRS) and the Generally

 Accounting policies can vary among different companies and geographies.

 Conservative accounting policies understate a company’s current financial

 A variation on these two approaches is the modified cash basis of accounting.

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