UNIVERSITY OF IRINGA (UoI)

Faculty of Business and Economics

Department of Accounting and Finance
CLASS:LLB 1

COURSE NAME :ACCOUNTING FOR LEGAL PRACTICE

Topic 2 – Accounting Principles
Mr.Baraka Mgongolwa
Mob. 0764-216446
bmgongolwa@gmail.com
 TOPIC 2

ACCOUNTING PRINCIPLES
 Meaning of Accounting principles
Accounting principles are the rules and guidelines that companies and
other bodies must follow when reporting or recording financial data.
These rules make it easier to examine financial data by standardizing the
terms and methods that accountants must use.
• These are basic guidelines that provide standards for scientific
accounting practices and procedures.
• They guide as to how the transactions are to be recorded and reported.
• They assure uniformity and understandability.
 Categories of Accounting Principles

1. Accounting concepts
2. Accounting conventions
 Accounting concepts

Accounting concepts are the fundamental

ideas and assumptions needed in
accounting. These are the fundamental rules
that must be followed while preparing the
financial statements. A clear disclosure must
be made in the financial statements if these
are not followed.
 Basic Accounting Concepts

1. The Business entity concept:

The business entity or separate entity concept states that
“an organization is separate from its owner(s) or the
owner of the business and the business it self are two
separate entity.
The purpose is to ensure that the transactions of an
organization are distinguished from the personal
transactions of the owner. Only business transactions are
should be recorded in the business books, and personal
transactions should be ignored unless they affect the
business.
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 Basic Accounting Concepts

2. Going concern
The going concern concept assumes that an entity
(I) will continue its operations for at least the next 12 months or will
operate for unforeseeable future period of time.
(ii) does not have any intention or need to close down its operations
For example, Due to an outdated production method, the demand for
the product is reduced ( and therefore the company has to reduce its
production substantially. This affects going concern assumption.
 Cont..

3. Consistency
According to this concept, the policy once adopted in one accounting
period should be consistently followed in the subsequent accounting
periods. Consistency means the financial statements should be prepared in
the same manner period after period
4. Prudence / Concept of Conservatism
The prudence concept means that normally the accountant will take
the figure which will understate rather than overstate the profit.
This is happen when an account is facing a dilemma.
 Thus s/he should choose the figure which will cause the capital, revenue
and profit of the firm be shown at a lower amount rather than at a higher
one.
 She will also make sure that all losses are recorded in the books, but
profits should not be anticipated by recording them before they should be.
 Cont..
5. Accrual Concept
This concept states “Expenses are recognized when incurred but not
the when the cash/Cheque is paid and Revenue are recognized when
earned but not when the cash/cheque is received”
 Recognized means to transfer to statement of Profit/loss or Income
statement
6.Matching Concept
It is referred to as matching of expenses against incomes. It means that
all incomes and expenses relating to the financial period to which the
accounts relate should be taken in to account without regard to the date
of receipts or payment.
 Cont..
5. The time interval concept:
This principle states that final accounts (Financial statement) prepared at regular
intervals of one year. Sometimes they might be prepared quarterly, monthly, …
depending on the need of the management.
6. The historical cost concept:
This means that assets are normally shown at cost price, and that this is the
basis for valuation. Not only that but also during at acquisition , all costs
associated to bring the asset at working condition must be recorded such as
installation costs
7. The money measurement concept:
Accounting information has long been concerned with only items that can be
measured in money terms and that can be agreed by most people as to the money
value of the transaction.
This concept means that accounting cannot tell you everything you would like to
know about the organization (workforce problems, management, competition,
 Cont..
8. Duality Concept
According to this concept every transaction has two aspects i.e. the
benefit receiving aspect and benefit giving aspect. These two aspects are
to be recorded in the books of accounts. This concept lead to the birth of
the concept called “Double Entry system “
Meaning of double Entry System
“For the every debit entry there must be a corresponding credit entry of
the same amount and vice versa” or ‘This is when business transactions
are recorded twice’
 Meaning of Accounting conventions
An accounting convention may be defined as attributes or
characteristics that financial statements should possess. One has to
maintain balance between all the conventions. These conventions
make the financial statements more accurate and acceptable.
These are custom or generally accepted practice which is adopted
either by general agreement or common consent among accountants.
 Overview of financial statements
Financial statements are accounting reports containing the
general-purpose financial information intended to be known
by persons outside a business organization.
A complete set of financial statements includes:
1. A Statement of Financial Position: shows at a specific date the
financial position of the company, by indicating the resources that it
owns, the debts that it owes, and the amount of the owner’s equity
(investment) in the business.
2. A Statement of Comprehensive Income/Income statement:
indicates the profitability of the business over the preceding
accounting period.
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 Cont..

1. Fair presentation
(a) Meaning of fair presentation
Fair presentation is
(i) presenting accurate financial statements e.g. free from mathematical errors
(ii) adopting in totality, all the accounting standards (not just a few) prescribed by
the IASB for the
preparation of financial statements.
(iii) complying with all legal requirements e.g. companies in Tanzania need to
present their statement of financial.
positions according to the format given in the Companies Act in Tanzania. If a
company does not follow the prescribed format, this amounts to unfair presentation.
(iv) not manipulating the financial statements e.g. reporting more profit than the
actual.
 Cont..

2. Materiality
Materiality means relative importance. Material items are important
items that the users of the financial statements must know. The
financial statements should show all the material items separately.
The concept of materiality relates to the time, efforts and the cost of
accounting in relation to the usefulness of the data generated.
Materiality requires that only those items which have a bearing on the
determination of financial position and computation of profit and loss
during the accounting period should be recorded and disclosed in the
financial statements.
 Cont..
3. Reliability
This concept requires that the financial statements should contain
reliable information. Information is reliable when it is free from
material error and bias.
Relevant but unreliable information should not be recognized in the
financial statements.
Home work
Difference between Errors and Frauds
 Cont..
4. Relevance
This means accounting information must be reflect what is going on in
the firm. Relevance refers to the usefulness of the accounting data
generated. The concept of relevance requires that the financial
statements should provide all the information that would be relevant to
help users determine financial performance.
5. Neutrality
Neutrality is also referred to as objectivity. It refers to the fact that the
financial statements must be neutral, unbiased and free from personal
opinions and prejudices. Neutrality is an essential aspect of faithful
representation because biased financial reporting information cannot
faithfully represent such information.
 Cont.…
6. Completeness
The concept of completeness requires that nothing material should be
left out of the financial statements. This is because incomplete financial
statements can mislead the users
7. Comparability
Comparability implies the ability of users of financial statements to
compare the accounts of similar companies (operating within the same
industry) and to compare their performance over different periods of
time. A company should also be able to compare its own accounts over
different periods of time.
 END OF TOPIC TWO

Any Questions? Any Comments? Suggestions?

Thank you

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