2. Presented By
Group: A
Department of BBA
Fakrul Abdein 110170200
Jakir Khan 110170201
Shahriar Khan Lodhi 110170202
Sheikh Amranul Islam Ridoy 110170203
Northern University Bangladesh
3. Accounting Principles
As indicated in the Feature Story, it is important that companies
have general guidelines available to resolve accounting issues.
Without these basic guidelines, each company would have to
develop its own set of accounting practices. If this
happened, we would have to become familiar with every
company’s peculiar accounting and reporting rules in order to
understand its financial statements. It would be almost
impossible to compare the financial statements of different
companies. This chapter explores the basic accounting
principles that are followed in developing specific accounting
guidelines. The content and organization of Accounting
Principles are as follows.
4. Accounting Principles
Constraints in
Assumptions Principles
Accounting
• Monetary • Revenue • Materiality
unit recognition
• Economic
• Matching • Conservatism
entity
• Time • Full
period disclosure
• Going
• Cost
concern
5. Assumptions
The monetary unit assumption states that only transaction
data that can be expressed in terms of money be included in
the accounting records.
Example
A company does not report the value of the company
president in its financial records because that value cannot
be expressed easily in dollars. An important corollary to the
monetary unit assumption is the assumption that the unit of
measure remains relatively constant over time. We will discuss
this point in more detail later in this chapter. E T H I C S N O T E
In an action that sent shock
6. Economic Entity Assumption
The economic entity assumption states that the activities of the
entity be kept separate and distinct from the activities of the
owner and of all other economic entities.
Example
It is assumed that the activities of IBM can be distinguished
from those of other computer companies such as
Apple, Dell, and Hewlett-Packard. Alcatel-Alsthom was taken
into
custody for an apparent violation of the economic entity
assumption. Allegedly, the executive improperly
used company funds to install an expensive security
7. Time Period Assumption
The time period assumption states that the economic life of a
business can be divided into artificial time periods. Thus, it is
assumed that companies such as General Electric, Time
Warner, and ExxonMobil, can subdivide their business
activities into months, quarters, or a year for meaningful
financial reporting purposes.
8. Going Concern Assumption
Financial statements are prepared assuming that the
company is a going concern which means that the company
intends to continue its business and is able to do so.
The status of going concern is important because if the
company is a going concern it has to follow the generally
accepted accounting standards.
The auditors of the company determine whether the company
is a going concern of not at the date of financial statements.
9. Examples
• An oil and gas firm operating in Nigeria is stopped by the
Nigerian court from carrying out operations in Nigeria that firm is
not a going concern in Nigeria, because it has to shut down.
• A bank is in serious financial troubles and the government is
not willing to bail it out. The Board of Directors has passed a
resolution to liquidate the business. The bank is not a going
concern.
• A merchandising company has a current ratio below 0.5. A
creditor $1,000,000 demanded payment which the company
could not make. The creditor requested the court to liquidate
the business and recover his debts and the court grants the
order. The company is no longer a going concern.
• A nationalized refinery is in cash flows problems but the
government of the country provided a guarantee to the
refinery to help it out with all payments, the refinery is a going
concern despite poor financial position.
10. PRINCIPLES
Revenue recognition principle tells that revenue is to be recognized only
when the rewards and benefits associated with the items sold or service
provided is transferred, where the amount can be estimated reliability and
when the amount is recoverable.
Accrual basis of accounting is used in recognizing revenue which tells that
revenue is to be recognized ignoring when the cash inflows occur.
Examples
1.A telecommunication company sells talk time through scratch cards. No
revenue is recognized when the scratch card is sold, but it is recognized
when the subscriber makes a call and consumes the talk time.
2.A monthly magazine receives 1,000 subscriptions of $240 to be paid at the
beginning of the year. Each month it recognizes revenue worth $20,000
[$240/12*1,000].
3.A media company recognizes revenue when the ads are aired even if the
payment is not received or where payment is received in advance.
11. In order to reach accurate net income figure the expenses
incurred in earnings revenues recognized in a time period
should be recognized in that time period and not in the next
or previous. This is called matching principle.
Examples
1.$2,000,000 worth of sales are made in 2010. Total purchases
of inventory were $1,000,000 of which $100,000 remained on
hand at the end of 2010. The cost of earnings is $2,000,000
revenue is $900,000 [$1,000,000 minus $100,000] and this
should be recognized in 2010 thereby yielding a gross profit of
$1,100,000.
2.A hospital pays $20,000 per month to 5 of its doctors.
Monthly sales are $500,000. $100,000 worth of monthly salaries
should be matched with $500,000 of revenue generated.
12. Full disclosure principle is relevant to materiality concept. It requires that
all material information has to be disclosed in the financial statements
either on the face or in the notes to the accounts.
Examples
1.Accounting policies need to be disclosed because they help
understand the basis of accounting.
2.Details of contingent liabilities, contingent assets, legal proceedings,
etc. are also relevant to the decision making of users and hence need
to be disclosed.
3.Significant events occurring after the date of the financial statements
but before the issue of financial statements (i.e. events after the
balance sheet date) need to be disclosed.
4.Details of property, plant and equipment cannot be presented on the
face of balance sheet, but a detailed schedule outlining movement in
cost and accumulated depreciation should be presented in the notes.
5.Tax rate is expected to change in near future. This information needs
to be disclosed.
13. COST PRINCIPLE
COST PRINCIPLE is the principle where a company is obliged
to record its fixed assets at their actual purchase price or
production cost.
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.
In deciding whether a piece of information is material or not requires
considerable judgment. Information is material either due to the amount
involved or due to the importance of the event.
Examples
1.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.
2.The remuneration paid to the executives and the directors is material.
3.The accounting policies are material because they help the users
understand the figures.
14. Conservatism
A branch of accounting that requires a high degree of verification before
making a legal claim to any profit. Accounting conservatism will
recognize all probable losses as they are discovered and most
expenditures as they are incurred. Revenue will be deferred until it is
verified. Having strict revenue-recognition criteria is one of the most
common forms of accounting conservatism.
