Accounting Principles

Following are the accounting principles and concept:

Going concern
State that business activities will continue for the foreseeable future period.
Financial statements are normally prepared on the assumption that the reporting entity is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity
has neither the intention nor the need to enter liquidation or to cease trading. If such an intention or
need exists, the financial statements may have to be prepared on a different basis. If so, the financial
statements describe the basis used(Conceptual Framework, Para 3.9.).
Examples where the going concern assumption should be rejected are:
 if the business is going to close down in the near future;
 where shortage of cash makes it almost certain that the business will have to cease trading;
 where a large part of the business will almost certainly have to be closed down because of a shortage
of cash(Frank Wood’s Business Accounting 1).
Accrual basis
States that revenue and expenses should be recorded when its becomes dues irrespective of cash
received/paid.
Accrual accounting depicts the effects of transactions and other events and circumstances on a
reporting entity’s economic resources and claims in the periods in which those effects occur, even if the
resulting cash receipts and payments occur in a different period. This is important because information
about a reporting entity’s economic resources and claims and changes in its economic resources and
claims during a period provides a better basis for assessing the entity’s past and future performance
than information solely about cash receipts and payments during that period(Conceptual Framework,
Para 1.17.)
Information about a reporting entity’s financial performance during a period can also help users to
assess management’s stewardship of the entity’s economic resource(Conceptual Framework, Para
1.18.).
Net profit is the difference between revenues and the expenses incurred in generating those revenues,
i.e.
Revenues — Expenses = Net Profit
Determining the expenses used up to obtain the revenues is referred to as matching expenses against
revenues. The key to the application of the concept is that all income and charges relating to the
financial period to which the financial statements relate should be taken into account without regard to
the date of receipt or payment(Frank Wood’s Business Accounting 1).
*Stewardship means protecting assets of an organization through a commitment to ethical and prudent financial
decision making.
Materiality
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence
decisions that the primary users of general purpose financial reports make on the basis of those reports,
which provide financial information about a specific reporting entity. In other words, materiality is an
entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the
information relates in the context of an individual entity’s financial report. Consequently, the Board
cannot specify a uniform quantitative threshold for materiality or predetermine what could be material
in a particular situation(Conceptual Framework, Para 2.11).
Consistency
States that accounting information should be based on same method of accounting.
The use of the same methods for the same items, either from period to period within a reporting entity
or in a single period across entities(Conceptual Framework, Para 2.26).
When assets and liabilities are related in some way, using different measurement bases for those assets
and liabilities can create a measurement inconsistency (accounting mismatch). If financial statements
contain measurement inconsistencies, those financial statements may not faithfully represent some

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 Accounting Principles

aspects of the entity’s financial position and financial performance. Consequently, in some
circumstances, using the same measurement basis for related assets and liabilities may provide users of
financial statements with information that is more useful than the information that would result from
using different measurement bases(Conceptual Framework, Para 6.58).
Prudence
Prudence is the exercise of caution when making judgements under conditions of uncertainty. The
exercise of prudence means that assets and income are not overstated and liabilities and expenses are
not understated.6 Equally, the exercise of prudence does not allow for the understatement of assets or
income or the overstatement of liabilities or expenses. Such misstatements can lead to the
overstatement or understatement of income or expenses in future periods. Neutrality is supported by
the exercise of prudence(Conceptual Framework, Para 2.16).
Duality (dual aspect)
This refers to double entry accounting which means every transaction has a dual aspect. Double entry
definition is not available in conceptual framework.
This states that there are two aspects of accounting, one represented by the assets of the business and
the other by the claims against them. The concept states that these two aspects are always equal to
each other. In other words, this is the alternate form of the accounting equation:
Assets = Capital + Liabilities
When we enter the data relating to a transaction in the accounting records we need to ensure that the
items that were affected by the transaction, and only those items, are shown as having changed.
Bookkeeping is the first stage in doing so. It can take many forms, but the one that is most used is called
double entry bookkeeping(Frank Wood’s Business Accounting 1).
Debit means 'place on the left of the account called' and credit means 'place on the right of the account
called'. These two words 'debit' and 'credit' are central to understanding double entry bookkeeping.
Every time you record a transaction, you debit one account, and you credit another account. The
amount you debit to the first account will always be equal to the amount you credit to the other
account. This is why we call this form of bookkeeping, 'double entry(Frank Wood’s Business Accounting
1).
Business entity(Reporting entity)
This means that the business is treated as separate entity from owners of the business and in conceptual
framework it is refers as reporting entiry.
The business entity concept implies that the affairs of a business are to be treated as being quite
separate from the non-business activities of its owner(s). The items recorded in the books of the
business are, therefore, restricted to the transactions of the business. No matter what activities the
proprietor(s) get up to outside the business, they are completely disregarded in the books kept by the
business. The only time that the personal resources of the proprietor(s) affect the accounting records of
a business is when they introduce new capital into the business, or take drawings out of it(Frank Wood’s
Business Accounting 1).
Historical cost(cost concept)
Assets are normally shown at cost price which is basic valuation of assets.
Historical cost measures provide monetary information about assets, liabilities and related income and
expenses, using information derived, at least in part, from the price of the transaction or other event
that gave rise to them. Unlike current value, historical cost does not reflect changes in
values(Conceptual Framework, Para 6.4).
The historical cost of an asset when it is acquired or created is the value of the costs incurred in
acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus
transaction costs(Conceptual Framework, Para 6.5).

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 Accounting Principles

Substance over form

Transactions and other events must be accounted for and presented in accordance with their substance
and economic reality and not merely their legal form. This is referred to as substance over form(Frank
Wood’s Business Accounting 1).
The terms of a contract create rights and obligations for an entity that is a party to that contract. To
represent those rights and obligations faithfully, financial statements report their substance. In some
cases, the substance of the rights and obligations is clear from the legal form of the contract. In other
cases, the terms of the contract or a group or series of contracts require analysis to identify the
substance of the rights and obligations(Conceptual Framework, Para 4.59).
In many circumstances, the substance of an economic phenomenon and its legal form are the same. If
they are not the same, providing information only about the legal form would not faithfully represent
the economic phenomenon(Conceptual Framework, Para 2.12).
All terms in a contract—whether explicit or implicit—are considered unless they have no substance.
Implicit terms could include, for example, obligations imposed by statute, such as statutory warranty
obligations imposed on entities that enter into contracts to sell goods to customers(Conceptual
Framework, Para 4.60).
Terms that have no substance are disregarded. A term has no substance if it has no discernible
(noticeable/obvious) effect on the economics of the contract. Terms that have no substance could
include, for example:
(a) terms that bind neither party; or
(b) rights, including options, that the holder will not have the practical ability to exercise in any
circumstances(Conceptual Framework, Para 4.61).
We will take a car as an example. Imagine it was being bought in this way.
 From a legal point of view, the car does not belong to the business until (i) all the instalments on the
lease have been paid and (ii) an option has been taken up whereby the business takes over legal
possession of the car.
 From an economic point of view, you have used the car for business purposes, just as any other car
owned by the business which was paid for immediately has been used. In this case, the business will
show the car being bought under a leasing agreement in its ledger accounts and statement of
financial position as though it were legally owned by the business. It will also include an account in its
ledger for the amount still to be paid and include it among the liabilities at the period end.
In this way, therefore, the substance of the transaction has taken precedence over the legal form of the
transaction(Frank Wood’s Business Accounting 1).
Full disclosure
States that information provided in the financial reports and statements should be complete.
A reporting entity communicates information about its assets, liabilities, equity, income and expenses by
presenting and disclosing information in its financial statements(Conceptual Framework, Para 7.1).
Effective communication of information in financial statements makes that information more relevant
and contributes to a faithful representation of an entity’s assets, liabilities, equity, income and expenses.
It also enhances the understandability and comparability of information in financial statements
(Conceptual Framework, Para 7.2).
it is important to consider whether the benefits provided to users of financial statements by presenting
or disclosing particular information are likely to justify the costs of providing and using that
information(Conceptual Framework, Para 7.3).
Accounting year/ Reporting period concept/Time interval concept
Financial statements are prepared for a specified period of time (reporting period) and provide
information about:
 assets and liabilities—including unrecognised assets and liabilities— and equity that existed at the
end of the reporting period, or during the reporting period; and
 income and expenses for the reporting period(Conceptual Framework, Para 3.4).

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To help users of financial statements to identify and assess changes and trends, financial statements
also provide comparative information for at least one preceding reporting period(Conceptual
Framework, Para 3.5).
Money measurement concept
Accounting information has traditionally been concerned only with those facts covered by [a) and (b)
which follow:
a. it can be measured in monetary units; and
b. most people will agree to the monetary value of the transaction.
This limitation is referred to as the money measurement concept, and it means that accounting can
never tell you everything about a business. For example, accounting does not show the following:
c. whether the business has good or bad managers;
d. whether there are serious problems with the workforce;
e. whether a rival product is about to take away many of the best customers;
f. whether the government is about to pass a law which will cost the business a lot of extra expense in
future.
The reason that (c) to (f) or similar items are not recorded is that it would be impossible to work out a
monetary value for them which most people would agree to.
Some people think that accounting and financial statements tell you everything you want to know about
a business. The above shows that this is not the case(Frank Wood’s Business Accounting 1).

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