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Module 2 - Financial Accounting Principles

This document outlines 10 key financial accounting principles: 1. Accounting policies should be chosen to provide a true and fair view of an entity's financial position, and should be reviewed regularly for appropriateness. 2. Principles include accrual accounting, the accounting entity, going concern, prudence, consistency, and materiality. They provide common rules for preparing financial reports and allow for comparison between entities and periods. 3. Specific principles covered include recognizing revenue when earned rather than when cash is received, matching expenses with revenues, and realizing revenue only once goods or services are delivered.

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Vimbai Musangeya
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© Attribution Non-Commercial (BY-NC)
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Download as PPT, PDF, TXT or read online on Scribd
132 views

Module 2 - Financial Accounting Principles

This document outlines 10 key financial accounting principles: 1. Accounting policies should be chosen to provide a true and fair view of an entity's financial position, and should be reviewed regularly for appropriateness. 2. Principles include accrual accounting, the accounting entity, going concern, prudence, consistency, and materiality. They provide common rules for preparing financial reports and allow for comparison between entities and periods. 3. Specific principles covered include recognizing revenue when earned rather than when cash is received, matching expenses with revenues, and realizing revenue only once goods or services are delivered.

Uploaded by

Vimbai Musangeya
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Financial Accounting Principles

Lucky Yona
Accounting Policies
 The principles, bases, conventions, rules and procedures adopted by
management /company in preparing and presenting financial
statements.
 An entity should adopt the accounting policies which are most
appropriate to its particular circumstances for the purpose of giving a
true and fair view.
 An entity accounting policies should be reviewed regularly that they
remain the most appropriate to its particular circumstances.
 Review the policy if it is judged more appropriate to the entity particular
circumstances than the present accounting policy.
 However, all changes in accounting policy should adhere to accounting
standards issued by the International Accounting Standard Board
( IASB)
Financial Accounting Principles
 These are common rules in preparing financial
Accounts reports.
 Broad basic assumptions, working rules and decision
criteria, which underlie the periodic financial
statements of the business enterprises.
 Where financial reports are prepared according to
these principles
 Inter comparison of financial information between entities is
easy, thus helping to compare financial performance.
 Intercomparison between periods within the same company
is facilitated.
Financial Accounting Principles

1. Stability of Currency
 Money is a unit of measurement. Financial Accounting
cannot be record any transaction which cannot be
Quantified in monetary terms.
 Money should be assumed to be stable over a reporting
time.

2. Accrual Principle
 Income should be recognized and accounted for as they
are earned even though cash has not been collected
 Expenditure should be recognized and accounted for at
the time they are incurred though not yet paid.
Financial Accounting Principles

3. Accounting Entity Principle


 Business Entity should be segregated from its owner
 The separation defines the boundary between personal and business
transactions.
 Revenues and expenses should be kept separate from personal
expenses. This applies even for partnerships and sole
proprietorships. The entity concept does not necessarily refer to
a legal entity.

4. The Going Concern Principle


 Financial Statement should be prepared on assumption that the
enterprise will continue in operation for the foreseable future, and that
there is no intention or necessity to wind up or significantly curtail the
scale of the enterprises.
 No provisions are made for losses in value of assets.
Financial Accounting Principles

5. Prudence or Conservatism
 Profits should not be anticipated but only when realized where
losses can be anticipated . This minimizes the risks of being over
optimistic
 Prudence or Conservatism states that when choosing
between two solutions, the one that will be least likely to
overstate assets and income should be picked. The
implication in all this is that contingent (doubtful) items of
revenue should not be anticipated and should not therefore
be recorded, whereas if such items are items of expenditure,
they should be recognised and recorded.
 Essentially it implies that the lowest values of assets and revenue
and highest values of liabilities and expenses should preferably
be reported.
6.
The Cost Concept
 All assets Acquired must be valued at cost or Market
Value.
 It implies an item is to be recognized at an exchange price
at the date of purchase and is to be shown in the financial
statement at that value or market value.
Financial Accounting Principles

7. The Consistency Principle.


 The treatment of like items/events should be recorded and
reported in consistent manner from period to period.
 The adoption of this principle makes financial statements
more comparable and avoids distortion and manipulation of
income and balance sheet items.
 Violation can only be accepted if circumstances have
changed so much to warrant distortion of the true and fair
view of the financial statements.
Financial Accounting Principles

8. The Matching Principle


 Revenue should be matched with expenses for
the same accounting period to correctly determine
the periods net income.
 Dangers of not matching:- Incorrectly
determination of net income.
Financial Accounting Principles

Realization Principle
 A sale is recognized when the produce or a
service has been delivered and the buyer
has accepted the invoice.
 At this point ownership is transferred and the
transaction is recognized as sale revenue
Realization Principle….

 In the books of account, goods have been replaced


by either cash or by a delivery.
 Revenue and costs are recorded when they are
incurred not when cash is received or paid.
 A sale made in one accounting period is classed a
revenue even though the inflow of cash occurs in the
next accounting period. A sale is realized when a
good is delivered.
Financial Accounting Principles

10. The Materiality Principle


 Information is material if its omission or misstatement could
influence the economic decision of users taken on the basis of
the financial statements.
 Materiality depends on the size of the item or error judged in
the particular circumstances of its omission or misstatement.
 Thus, materiality provides a threshold or cut-off point rather
than being a primary qualitative characteristic which information
must have if it is to be useful." `
Exercises

“ THE END”

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