Accounting in English ……….

Chapter (1) Theoretical Framework of Accounting

CHAPTER
(1)
THEORETICAL FRAMEWORK
OF ACCOUNTING

1- Introduction to Accounting
 Forms of Business Firms
 Definition of Accounting
 Objectives of Accounting
 Kinds of Accounting
 Functions of Accounting
 Fields of Accounting Activities
2- Accounting Assumptions, Principles, and Constraints
(Concepts)
 Fundamental Assumptions
 Accounting Principles
 Accounting Constraints
3- Accounting as an Information System (A.I.S)
 Accounting information and its user’s
 Users of accounting information
 Qualitative Characteristics of Accounting
 Elements of Accounting
♦ Questions 

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

CHAPTER
(1)
THEORETICAL FRAMEWORK
OF ACCOUNTING
‫االطار النظري للمحاسبة‬

Financial accounting is the field ( ‫ ) حقل‬of accountancy (‫)علم المحاسبة‬

concerned with the preparation of financial statements for decision makers,
such as managements, employees, stockholders, suppliers, banks,
government agencies, owners, and other outside parties. Financial
accountancy is used to prepare accounting information for people outside
the organization.
In short, Financial Accounting is the process of summarizing
financial data taken from an organization's accounting records and
publishing in the form of annual reports for the benefit of people outside the
organization. Financial accountancy is governed by both local and
international accounting standards.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

1- INTRODUCTION TO ACCOUNTING
‫مدخل إلى المحاسبة‬
Business activity is the process of transforming inputs into outputs
by addition value. An accounting is a system that collects, records, stores,
and processes data to produce information for decision makers into several
firms. The type of a business depends on size of activity which is performed
by the business .Thus the accounting must be carefully addressed because of
the tax, managerial, legal and liability impacts that business formation has.
A- Forms of Business Firms ‫أشكال منشات األعمال‬
From Commercial and Legal angles, a business may be organized in
many ways. There are a number of different forms of Business firms.
However, the common forms of organizing are: Sole proprietorship,
Partnership, Limited Company and corporation.
(1) Sole proprietorship ‫المنشاة الفردية‬
The business is carried on by single individual. All the profits of the
business earn go to him. The sole proprietors’ liability is unlimited, and he
is personally liable for paying of the debts.
(2) A partnership ‫شركة التضامن‬
This firm comprises a minimum of two and a maximum of (20)
persons trading together as one firm and sharing in the profits. In addition to
sharing the profits, each partner shares unlimited Liability for all the debts
and obligations of the firm and is responsible for the Liabilities in the firm
of his fellow partners as well as his own.
(3) A limited company ‫الشركة المحدودة‬
A limited company is a Legal entity and is treated by the law like a
natural person; it must be run according to the rules set out by the company
law. Among other provisions, it is laid down that financial statement must

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

be prepared and audited every year and be made available for inspection on
a public register.
(4) Corporation ‫شركة مساهمة‬
The Corporation structure consists of the shareholders and the board
of directors. The shareholders a point the board of directors to manage the
company. The capital of a company is divided into units of ownership called
shares .The shares of a public company are freely transferable from one
individual to another.
B- Definition of Accounting ‫تعريف المحاسبة‬
The Americans Accounting Association (AAA‫)جمعية المحاسبين األمريكية‬
defines accounting as follows:
"The process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the
information!
This definition can present the following notes:
(1) The definition suggests that accounting is about providing information to
its readers. Accounting information is economic information, it relates to the
financial or economic activities of the business or organization.
(2) Accounting information needs to be identified and measured. This is
done by way of a "set of accounts", based on a system of accounting known
as double-entry book-keeping ( ‫)مسك القيد المزدوج‬. The accounting system
identifies and records "accounting transactions"(‫)معامالت محاسبية‬.
(3) The "measurement" of accounting information involves making
judgments about the value of assets owned by a business or liabilities owed
(‫ )دين على المنشاة‬by a business. It is also about accurately measuring how
much profit or loss has been made by a business in a particular period.
(4) The definition identifies the need for accounting information to be
communicated. The way in which this communication is achieved may
vary. There are several forms of accounting communication (e.g. annual
report and accounts, management accounting reports) each of which serve a

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

slightly different purpose. Accounting information is communicated by

using "financial statements".
 What is the purpose of financial statements?
There are two main purposes of financial statements:
(1) To report on the financial position of an entity (e.g. a business, an
organization).
(2) To show how the entity has performed (financially) over a particularly
period of time (an "accounting period").
The most common measurement of "performance"(‫ )أداء‬is profit. It is
important to understand that financial statements can be historical or relate
to the future.
C- Objectives of accounting ‫أهداف المحاسبة‬
Accounting is the process of recording, summarizing, analyzing, and
interpreting financial (money related) activities to permit individuals and
organizations to make informed judgments and decisions. By law all
businesses must keep accounting records. Decisions are based on
accounting information for profit and non-profit companies’ alike.
♦ Objectives of organizations ‫أهداف المنظمات‬
Most organizations are externally accountable ( ‫عرضة للمسؤولية‬
‫ )الخارجية‬in some way for their actions and activities. They will produce
reports on their activities that will reflect their objectives and the people to
whom they are accountable.
The table below provides examples of different types of
organizations and how accountability is linked to their differing
organizational objectives:

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

Table (1-1) : organizations and their objectives

No. Organizations Objectives Accountable to

(‫)المنظمات‬ (‫)األهداف‬ (examples)

Private or
- Shareholders
Public  Making of profit.
1 - Other stakeholders
companies
 Creation of wealth. (e.g. employees,
‫شركات عامة أو‬
customers, suppliers)
‫خاصة‬

 Achievement of
charitable aims. - Charity
2 Charities ‫منظمات‬
commissioners
‫خيرية‬  Maximize spending - Donors
on activities.

 Provision of local
Local services. - Local electorate
Authorities - Government
‫سلطات محلية‬  Optimal allocation departments
3
of spending budget.

 Provision of public
Public services service (often
‫خدمات عامة‬ required by law). - Government
4 ministers
(e.g. transport,  High quality and - Consumers
health) reliability of
services.

 Regulation or
Quasi- instigation of some
5 - Government
governmental public action.
ministers
agencies ‫وكاالت‬  Coordination of - Consumers
‫شبه حكومية‬ public sector
investments.

All of the above organizations have significant roles to play in

society and have multiple stockholders to whom they are accountable. All

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

require systems of financial management to enable them to produce

accounting information.
♦ Purposes of accounting ‫أغراض المحاسبة‬
How accounting information helps businesses to be accountable. As
it's showed in the definition, accounting is essentially an "information
process" that serves several purposes:
(1) Providing a record of assets owned, amounts owed to others and monies
invested.
(2) Providing reports showing the financial position of an organization and
the profitability of its operations.
(3) Helps management actually manage the organization.
(4) Provides a way of measuring an organization’s effectiveness.
(5) Helps stockholders monitor an organizations activities and performance
(6) Enables potential investors or funders to evaluate an organization and
make decisions.
D- Kinds of Accounting Information ‫أنواع المعلومات المحاسبة‬
There are two broad types of accounting information:
(1) Financial Accounts )‫ )حسابات مالية‬: aimed more at external users of
accounting information .
(2) Management Accounts (‫)حسابات إدارية‬: aimed more at internal users of
accounting information.
Although there is a difference in the type of information presented in
financial and management accounts, the underlying objective is the same to
satisfy the information needs of the user. These needs can be described in
terms of the following overall information objectives:

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

Table (1-2): Descriptions of Terms

No Terms Descriptions

Collection Collection in money terms of information

1 relating to transactions that have resulted
‫تحصيل‬ from business operations.

Recording and Recording and classifying data into a

2 Classifying permanent and logical form. This is usually
‫تسجيل وتصنيف‬ referred to as "Book-keeping".

Summarizing data to produce statements and

Summarizing reports that will be useful to the various users
3
‫تلخيص‬ of accounting information, both external and
internal

Interpreting and Interpreting and communicating the

4 Communicating performance of the business to the
‫تفسير وإيصال‬ management and its owners.

Forecasting and planning for future operation

Forecasting and of the business by providing management
5 Planning with evaluations of the viability of proposed
‫تنبوء وتخطيط‬ operations. The key forecasting and planning
tool is the "Budget"‫موازنة‬

The process by which accounting information is collected, reported,

interpreted and auctioned (‫ )يباع بالمزاد‬is called "Financial Management".
Taking a commercial business as the most common organizational structure,
the key objectives of financial management would be to:
(1) Create wealth for the business.
(2) Generate cash.
(3) Provide an adequate return on investment bearing in mind the risks that
the business is taking and the resources invested.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

In preparing accounting information, care should be taken to ensure

that the information presents an accurate and true view of the business
performance and position.
For financial accounts, the regulation or control of what kind of
information is prepared and presented goes much further. The international
companies are required to comply with a wide range of Accounting
Standards which define the way in which business transactions are disclosed
and reported. These are applied by businesses through their Accounting
Policies.
♦ The main financial accounting statements
The purpose of financial accounting statements is mainly to show
the financial position of a business at a particular point in time and to show
how that business has performed over a specific period.
The three main financial accounting statements that help achieve this
aim are:
(1) The profit and loss account for the reporting period.
(2) A balance sheet for the business at the end of the reporting period.
(3) A cash flow statement for the reporting period.
A balance sheet shows at a particular point in time what resources
are owned by a business "assets" and what it owes to other parties
"liabilities". It also shows how much has been invested in the business and
what the sources of that investment finance were.
♦ What is the profit?
Profit is the amount by which sales revenue (also known as
"income") exceeds "expenses" (or "costs") for the period being measured.
♦ How companies report to their shareholders?
Companies usually publish annual financial statements for their
shareholders.
The financial statements you are going to study consist of:

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

 The profit and loss (P&L) account (‫)حساب األرباح والخسائر‬: an

analysis of revenue and expenses of a business for the year just
ended.
 The balance sheet (‫)ميزانية‬: a statement showing the assets, liabilities
and capital of a business.
 The cash flow statement (‫ )قائمة التدفق النقدي‬relating to the year just
ended: a statement showing how cash is generated and how it has
been spent by the business.
The contents of each of these financial statements will be presented
further in Chapter of financial statements in this book.
E- Functions of accounting ‫وظائف المحاسبة‬
It is generally accepted that accounting should serve the following
functions:
(1) Recording (‫)تسجيل‬: accounting systems supply a means of recording and
classifying data so as to enable the production of summarized financial
statements relating to the entity’s results and current state of affairs.
(2) Measuring (‫)قياس‬: accounting tries to assist in the measurement of the
economic results of the entity’s activities, usually with a view to sharing out
the results among the various interested parties: for example, government
(taxes), employees (wages), shareholders (dividends).
(3) Stewardship (‫)وظيفة الوكالة‬: accounting provides a record of how the
funds entrusted to managers have been used by them, and to what ends.
(4) Monitoring, planning and control (‫ رقابة‬، ‫ تخطيط‬، ‫)توجيه‬: accounting
should provide sufficient information on the results of past activities to
enable management to monitor the results, and take action if necessary, and
to formulate plans for the future.
(5) Information for decisions (‫)بيانات التخاذ القرارات‬: accounting should assist
investors, for example in deciding how to allocate their limited resources.
(6) Communication (‫)اتصال‬: accounting should communicate information to
both internal and external users. (Financial statements are the main tools
used to achieve this function for external users.)

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

F- Fields of Accounting Activities ‫حقول أنشطة المحاسبة‬

Accountants perform many diverse services and are engaged in
various types of employment. There are three major fields of accounting
activity: private accounting, public accounting, and governmental
accounting. Since each of these may comprise many aspects of accounting
activity, it is possible to give only a broad description for each type of
accounting employment.
♦ Private accounting ‫المحاسبة الخاصة‬
Private accounting is employed and used by the manufacturers,
wholesalers, retailers, and service firms. Depending on the complexity and
size of the business, the private accountant's duties may vary from routine
reporting to the design and installation of electronic accounting systems.
However, the major objective of the private accountant usually is to assist
management in planning and controlling the firm's operations.
♦ Public accounting ‫المحاسبة العامة‬
The field of public accounting is composed of firms that render
independent, expert reports on financial statements of business enterprises.
Public accounting firms also perform a wide variety of accounting and
managerial services, acting as consultants to their clients.
♦ Governmental Accounting ‫المحاسبة الحكومية‬
A subdivision of accounting practice relating primarily to accounting
for federal, state, and local governmental units agencies. The services
performed by this field of accounting parallel those of private and public
accounting and many cover the entire spectrum ( ‫ ) مجال‬of financial and
managerial accounting. Management provides accounting information to
help managers make decisions to manage the business.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

Table (1-3): Theory framework of accounting

‫اإلطار النظري للمحاسبة‬
(1) Objectives
Providing of information ‫تقديم المعلومات‬
1. Useful to investment and credit decisions.
2. Useful to estimation of future cash flows.
3. Useful to determine of firm’s resources and its changes.
(2) Items ‫العناصر‬ (3) Characteristics of information ‫خصائص المعلومات‬
 Assets 1. Fundamental characteristics
 Liabilities a. relevance
 Owner’s equity b. reliability
 Owner’s  objectivity
investments  neutrality
 Owner’s dividends 2. Secondary characteristics
 Compressive a. comparability
income. b. consistency
 Revenues
 Expenses
 Gains
(4) Assumptions ‫الفروض‬ (5) Principles ‫المبادئ‬ (6) Constraints ‫المحددات‬
1. Accounting entity 1. Historical cost 1. Consistency
2. Going – concern 2. Revenue 2. Cost and benefit
3. Measurement unit recognition 3. Materiality
4. Periodicity 3. Matching 4. Industry practices
5. Double Entry 4. Objectivity 5. Conservatism
5. Full disclosure

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

3-ACCOUNTING ASSUMPTIONS, PRINCIPLES

AND CONSTRAINTS
‫الفروض والمبادئ والمحددات المحاسبية‬
The theoretical foundation developed over the years by such
organizations as the (AICPA) )‫ ( معهد المحاسبين القانونيين األمريكي‬and the
Americans Accounting Association (AAA) includes fundamental
underlying assumptions which allow for certain basic premises(‫)مقدمات أساسية‬
as well as the Generally Accepted Accounting Principles (GAAP) ‫المبادئ‬
‫ المحاسبية المقبولة قبول عاما‬which provide a framework for professional judgment.
The theoretical structure of financial reporting is described
graphically in following Figure.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

Figure (1-1)
Theoretical structure

Accounting Objectives Fundamental Accounting

Underlying Assumptions

Terminology Definitions

Generally Accepted Accounting Principles

 Historical Cost  Consistency

 Revenue  Materiality
Recognition  Conservatism
 Matching  Cost & Benefit
 Objectivity
 Full Disclosure

Accounting Procedures

Financial Reports

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

The process of recording, classifying and summarizing the day-to-

day activities of the business firm requires considerable judgment on the
accountant's part. Since so much reliance is placed on financial reports, it is
imperative (‫ ضروري‬،‫ )إلزامي‬that the accounting system be designed to
generate information that will meet the needs of users, both internal (the
board of directors, corporation officers, employee groups) and external
(investors and creditors).
A- Fundamental Assumptions ‫الفروض األساسية‬
Some of the broad theoretical concepts on which the GAAP are
based include:
(1) Separate entity ‫استقاللية الوحدة‬
Revenues, costs and expenses apply to the business entity rather than
its owners. The accounting system is concerned primarily with three types
of entities: the proprietorship, the partnership and the corporation.

(2) Going-concern ‫االستمرارية‬

The accountant assumes, in preparing the records or financial

statements of any business, that the firm will continue in existence for the
foreseeable future (‫)المستقبل المنظور‬.
(3) Money Measuring Unit ‫وحدة القياس النقدي‬
It is assumed that the Dinar, or any currency in the world, is the best
measuring unit of business transactions. Thus, only those transactions terms
of money are measured and recorded.
(4) Time Period ‫الفترة الزمنية‬
So that accounting data can serve the decision-making process, it is
necessary that it be provided on a systematic basis of time intervals.
Comparison of reported results from one period to the next is useful in
determining performance patterns.
(5) Double-entry system ‫نظام القيد المزدوج‬
The standard accounting model for accumulating data in a business
entity consists of the double-entry system based on the fundamental

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

accounting equation. As the name implies, the entry made for each
transaction is composed of two parts: one or more debits and one or more
credits.
B- Accounting Principles ‫المبادئ المحاسبية‬
(1) Historical Cost ‫الكلفة التاريخية‬
The properties and assets acquired by an enterprise, as well as the
expenses incurred by it, are generally recorded at cost (the cash or
equivalent exchanged).
(2) Revenue Recognition ‫تحقق اإليراد‬
Revenues are realized when the market value of outputs can be
determined and supported and the transaction is essentially complete.
Example: The timing of revenue recognition varies according to the type of
transaction. In the case of merchandise sales, revenues are realized at the
point of sales, when goods are delivered and title has passed.

(3) Matching ‫المقابلة‬

In determining net income, it is necessary to match related costs and

expenses to revenues for the reporting period. The cost of the product sold
and all expenses incurred in generating the sale should be matched against
the respective revenues.

(4) Objectivity ‫الموضوعية‬

The financial statements generated by a business entity's books must
be supported by evidence (‫)دليل إثبات‬. When business documents showing the
details of a completed transaction do not or cannot exist, estimates based on
informed judgments which can be verified are included.
Example: Company Babel purchased an electronic typewriter for IQD
400000. Based upon their experience with similar machines and the
experience of the typewriter vendor, it was decided to use eight years as the
estimated life in the depreciation calculation. The depreciation expense

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

would therefore amount to IQD 50000 each year.

(5) Full Disclosure ‫اإلفصاح التام‬
For accurate interpretation, it is required that accounting reports
include financial statements and accompanying notes which call attention to
events and circumstances which may have a significant effect on potential
future earnings and/or a company's position.
C- Accounting Constraints ‫المحددات المحاسبية‬
(1) Consistency ‫الثبات أو االتساق‬
Any change in accounting procedures usually has some effect on
current or past income. Since it is important that income data be interpreted
and compared over time, the consistency constraint requires that any
deviation in procedures from those of the preceding year be clearly defined
as a footnote to the financial statements or possible retroactive restatement.

(2) Materiality ‫األهمية النسبية‬

The convention of Materiality refers to the relative importance of an

item or event in a financial statement and its influence on the decisions of
the users of financial statements.
Example: Blue Company has reported net income in excess of IQD 200000
for many years, established a rule that all shop supplies and small tools
purchased, which cost under IQD 100000, shall be treated as an expense
regardless of when used. This is acceptable accounting the constraint of
materiality.

(3) Conservatism ‫التحفظ‬

Current theory advocates (‫ )مؤيدو‬that in situations where data are

unclear or conflicting, the accountant's judgment should be in the direction
of understatement (‫ )تصريح اقل من الحقيقة‬rather than overstatement ( ‫شيء مبالغ‬
‫)فيه‬.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

(4) Industry Practices ‫الممارسات في قطاع األعمال المتخصصة‬

In some cases, the accountant can do his accounting transaction

without depending on general acceptance principles. For example an
evaluation of the financial investments in banks on basis of market value,
another example the banks do not full disclosure in details for their
activities.

(5) Economic Substance over Legal Form ‫تغليب الجوهر فوق الشكل القانوني‬

Some of financial transactions have an economic effect more than its

legal form. For example, sometime in sells transactions, in spite of the seller
received the worth of his goods sold but he still have the legal form of this
goods sold in this case it will not appear in his stock , because the
accountants should preferred the economic effect over the legal form .

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

4- ACCOUNTING AS AN INFORMATION SYSTEM

‫المحاسبة نظام للمعلومات‬
An '''accounting information system''' ('''AIS''') is the system of
records a business keeps to maintain its [[accounting system]]. This
includes the purchases, sales, and other financial processes of the business.
The purpose of (AIS) is to accumulate data and provide decision makers
(investors, creditors, and managers) with information.

A- Accounting information and its user’s ‫البيانات المحاسبية ومستخدميها‬

Different users require different accounting information for decision
making. The primary concern of shareholders (including potential
investors, their advisers and financial analysts) is whether their investments
will provide the required returns in the form of dividends and capital
growth. Therefore, they will seek (‫ ينشد‬،‫ )يقصد‬information in order to assess
the present and future ability of the company to pay dividends and whether
the value of their investments will rise in the future. But conventional
financial statements are prepared under the cost and money measurement
concepts.
B- Users of accounting information ‫مستخدمو البيانات المحاسبية‬
Interested parties are also called accounting information users. There
are two broad categories of accounting information users:
 Internal users ‫المستخدمون الداخليون‬
 External users ‫المستخدمون الخارجيون‬
(1) Internal users are parties inside the reporting entity (company) who are
interested in the accounting information.
A company's higher and middle management (‫)اإلدارة العليا والوسطى‬
uses accounting information to run business. Employees utilize accounting
information to determine a company's profitability and profit sharing.
(2) External users are parties outside the reporting entity (company) who
are interested in the accounting information.
Investors (owners) use accounting information to make buy, sell or
keep decisions related to shares, bonds, etc. Creditors (suppliers, banks)

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

utilize accounting information to make lending decisions. Taxing authorities

need accounting information to determine a company's tax liabilities.
Customers may need accounting information to decide which products and
from which company to buy.

Figure (1-2)
Types of accounting

Accounting

Financial Managerial
Accounting Accounting

 Financial accounting (‫ )المحاسبة المالية‬provides information that is

designed to satisfy the needs of external users. Such reporting is
usually done in the form of financial statements.

 Managerial accounting (‫ )المحاسبة اإلدارية‬provides information that is

useful in running a company by internal users. Such reporting is
usually accomplished through custom designed reports.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

Figure (1-3)
Typical Flows of Accounting Information

Management

Managerial Data
And Reports

Taxing
Certain
Tax ACCOUNTING
Agencies
Special Regulatory
Returns PROCESS*
Reports Agencies

Financial Accounting
Statements*

Public Accounting
Auditors*

Audited Financial
Accounting Statements*

Certain
Labor General
Regulatory Creditors Investors
Union Public
Agencies

*Reporting area governed by generally accepted accounting.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

C- Qualitative Characteristics of Accounting

‫الخصائص النوعية للمحاسبة‬
The characteristics of relevance and reliability are the two primary
qualities that make the accounting information useful for decision making.
If either is missing completely from a piece of information, the information
will not be useful. Other qualities include comparability, consistency, and
cost-benefit relationship.
(1) Relevance ‫المالئمة‬
To be relevant to investors, creditors, and others for investment,
credit, and similar decisions, accounting information must be capable of
making a difference in a decision. Relevant information should have
predictive value, feedback value, and timeliness. Relevant information helps
decision makers make predictions about future; it has “Predictive Value”
( ‫)القيمة التنبؤية‬.
(2) Reliability )‫المعولية(الموثوقية‬
Reliability is the quality of information that permits users to depend
on it with confidence (‫)ثقة‬. This means it is verifiable, has faithful
representation, and is reasonably free of errors and bias.
(3) Neutrality ‫الحيادية‬
Neutrality means that, in formulating or implementing standards, the
primary concern should be the relevance and reliability of the information
and the information cannot be selected to favor one set of decision makers
over another.
(4) Comparability ‫القابلية للمقارنة‬
Accounting information about an enterprise is extremely useful if it
can be compared to accounting information about other enterprises.
Comparability results when different enterprises apply the same accounting
treatment to similar events.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

(5) Consistency ‫الثبات أو االتساق‬

Consistency means conformity from period to period with
unchanging policies and procedures. Conformity can be achieved be
applying the same accounting treatment to similar events from period to
period.
(6) Cost & Benefit ‫الكلفة والمنفعة‬
Most decision makers assume that information is a cost free
commodity (‫)سلعي‬, while providers know it is not. The costs of providing the
information should be weighed against the benefits of using the information.
Cost-benefit decisions are extremely difficult because both costs and
benefits are often subjective and difficult or impossible to measure reliably.
D - Elements of accounting ‫عناصر المحاسبة‬
♦ Assets )‫األصول (الموجودات‬
Assets are items with money value that are owned by a business.
Some examples are: cash, accounts receivable (selling goods or services on
credit), equipment (office, store, delivery, etc.), and supplies (office, store,
delivery, etc.).
♦ Fixed Assets ‫األصول الثابتة‬
Sometimes called long-term assets, long-lived assets, or plant and
equipment. Fixed Assets include land, building, fixtures, and equipment..
♦ Current Assets ‫األصول المتداولة‬
Current assets constitute cash, items expected to be realized in cash,
sold or consumed during operating cycle of the business or one year,
whichever is longer.
FASB defined current assets as follows: Current assets are
economic benefits owned by a firm which are reasonably expected to be
converted into cash or used up during the entity's normal operating cycle or
one year, whichever is longer.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

Current assets are defined "Cash and other assets that are expected to
be converted into cash or consumed in the production of goods or rendering
of services in the normal course of business". Items are included under
current assets on the basis of whether they are expected to be realized within
one year or within the normal operating cycle of the enterprise, whichever is
the longer.
The classification of current assets, one typically finds the following:
▪ Inventories ‫المخزون‬
Inventories include those items of tangible property that (1) are held
for sale in the ordinary course of business, (2) are in process of production
for such sale. The cost of inventory includes all expenditures that were
incurred directly or indirectly to bring an item to its existing condition and
location.
▪ Accounts Receivables ‫الحسابات المدينة‬
Receivables encompass (‫ )يشمل‬monetary claims against debtors of
the firm. The term accounts receivable is commonly used to refer to
receivables from trade customers that are not supported by written notes.
▪ Marketable Securities ‫األسهم القابلة للتسويق‬
Marketable Securities represent temporary investments made to
secure a return on funds.
▪ Cash ‫النقد‬
Includes coin and currency on hand, bank deposits (if subject to
immediate withdrawal, e.g, checking accounts), negotiable paper (i.e.,
transferable by endorsement, in including bank checks, money orders, bank
drafts, etc.). Cash is the most liquid asset owned by a firm.
♦ Owner's Equity ‫حقوق الملكية‬
The difference between Assets and Liabilities is Owner’s Equity.
They can also be called capital, or net worth. Equity capital is the capital
invested by corporation's stockholder.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

♦ Liabilities )‫الخصوم (المطلوبات‬

Liabilities are debts owed by the business. Paying cash is often not
possible or convenient, so businesses purchase goods and services on credit.
The name of the account used is Accounts Payable. Another type of liability
is Notes Payable. This is a formal written promise to pay a specific amount
of money at a definite future date.
♦ The Accounting Equations ‫معادلة الميزانية‬
(1) Assets = Liabilities + Owner’s Equity ‫ حقوق الملكية‬+ ‫األصول = المطلوبات‬
(2) Assets + Expenses + Losses = Capital + Liabilities + Revenues + Gains
The two sides of these equations must always be equal.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

Terminology ‫المصطلحات‬

Accounting ‫محاسبة‬ Liabilities ‫المطلوبات‬

Accounting entity ‫الوحدةالمحاسبية‬ Limited Company ‫الشركة المحدودة‬
Accounting Equation ‫المعادلة المحاسبية‬ Management Accounts ‫الحسابات اإلدارية‬
Accounts Receivables ‫الحسابات المدينة‬ Marketable Securities ‫األسهم القابلة للتسويق‬
Assets ‫االصول‬ Matching ‫المقابلة‬
Assumptions ‫الفروض‬ Materiality ‫األهمية النسبية‬
Balance sheet ‫الميزانية‬ Measurement unit ‫وحدةالقياس‬
Book-keeping ‫مسك االسجالت‬ Neutrality ‫الحيادية‬
Cash flow ‫التدفق النقدي‬ Objectivity ‫الموضوعية‬
Comparability ‫القابلية للمقارنة‬ Organization ‫المنظمة‬
Conservatism ‫التحفظ‬ Owner’s equity ‫حقوق الملكية‬
Consistency ‫الثباات‬ Partnership ‫منشاة تضامنية‬
Constraints ‫المحددات‬ Periodicity ‫الدورية‬
Corporation ‫شركة مساهمة‬ Principles ‫المباديء‬
Cost and benefit ‫الكلفة والمنفعة‬ Private accounting ‫المحاسبة الخاصة‬
Current Assets ‫االصول المتداولة‬ Private companies ‫الشركات الخاصة‬
Double-entry ‫القيد المزدوج‬ Profit and loss (P&L) ‫الربح والخسارة‬
Expenses ‫المصرفات‬ Public accounting ‫المحاسبة العامة‬
External users ‫المستخدمين الخارجيين‬ Public companies ‫الشركات العامة‬
Financial Accounts ‫الحسابات المالية‬ Public services ‫الخدمات العامة‬
Financial statements ‫القوائم المالية‬ Relevance ‫المالئمة‬
Fixed Assets ‫االصول الثابتة‬ Reliability ‫الموثوقية‬
Forecasting ‫التنبؤ‬ Revenue recognition ‫االعتراف باإليراد‬
Full disclosure ‫اإلفصاح التام‬ Revenue ‫االيرد‬
Going – concern ‫االستمرارية‬ Separate entity ‫الوحدة المستقلة‬
Governmental Accounting ‫المحاسبة الحكومية‬ Sole proprietorship ‫منشاة فردية‬
Historical cost ‫الكلفة التاريخية‬ Stewardship ‫وظيفة الوكالة‬
Industry practices ‫الممارسات الصناعية‬ Stockholders ‫المساهمين‬
Internal users ‫المستخدمين الداخليين‬ Suppliers ‫المجهزين‬
Inventory ‫المخزون‬ Transaction ‫المعاملة او الصفقة‬

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

QUESTIONS
1- Define scientifically the accounting, and name only the assumptions and
principles accounting.
2- Mention the accounting Assumptions and explain two from them.
3- Mention the accounting principles and explain two from them.
4- Explain the purposes of accounting.
5- Explain the functions of accounting.
6- Match the following Organizations and its Objectives

No. Organizations No. Objectives

Quasi-governmental
1 a Making of profit
agencies
2 Public services b Achievement of charitable aims
3 Local Authorities c Provision of local services
4 Charities d Provision of public service
Coordination of public sector
5 Private or public company e
investments

7- Choose the correct answers:

(1) State whether each of the following statements are true or false.
a. Accounting is a language of business.
b. Accounting principles are referred to as rules of action on conduct.
c. Assets are always valued at market price as per the basis of the going
concern concept.
d. As per the convention of disclosure, all material information should
be disclosed by the accountants.
(2) The time period assumption states that:
a. Revenues should be recognized in the accounting period in which it
is earned.
b. Expenses should be matched with revenues.

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

c. The economic life of a business can be divided into artificial time

periods.
d. The fiscal year should be corresponds with the calendar year.
(3) The principle that dictates that efforts (expenses) be matched with an
accomplishment (revenues) is the:
(a) Matching principle. (b) Cost principle.(c) Revenue recognition principle.
(d) Full disclosure principle.
(4) Accounting includes:
(a) Measurement (b) Verification (c) Reporting (d) All of the previous,
(5) The Company opens drawings and capital account as an application
entity assumption (concept).
(a) Continuity (b) Periodicity (c) The entity (d) The unit of measurement
(6) All costs paid to buy a machine to make ready for intended use, is an
application of:
(a) Revenue recognition principle. (b) Continuity Concept. (c) Full-
disclosure principle.(d)Cost principle.
(7) Using the accounting procedures from year to year means:
(a) Conservatism (b) Matching (c) Consistency (d) Materiality
(8) All material information should be disclosed in the financial statements
to make these statements clear and understandable for the reader is:
(a) Materiality (b) Consistency (c) Matching (d) Full disclosure,

►Answers to question No. (6)

No. a b c d e
1 x
2 x
3 x
4 x
5 x

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Accounting in English ………. Chapter (1) Theoretical Framework of Accounting

►Answers to questions (7):

No. a b c d
1. True True False True
2. x
3. x
4. x
5. x
6. x
7. x
8. x



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