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Chapter#4 Accounting Concepts & Conventions

Fundamental of financial accounting

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36 views2 pages

Chapter#4 Accounting Concepts & Conventions

Fundamental of financial accounting

Uploaded by

arslannazir5482
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Level – I Accounting Concepts & Conventions Fundamentals of Financial Accounting

Accounting refers to the systematic recording of business transactions and


preparation of statements relating to assets, liabilities and functioning results of a
business. Accounting has to follow certain fundamental rules that form the basic
accounting concepts and principles. The main purpose of financial accounting is to
provide necessary economic information required for decision-making in a
business. Financial accounting follows certain rules and guidelines to prepare
reports on the financial standing of an entity.
Going Concern This accounting principle assumes that a company will continue
Principle to exist long enough to carry out its objectives and commitments
and will not liquidate in the foreseeable future.

Accruals An accrual allows an entity to record expenses and revenues for


which it expects to expend cash or receive cash, respectively, in a
future reporting period.

Prudence Prudence requires that accountants should exercise a degree of


caution in the adoption of policies and significant estimates such
that the assets and income of the entity are not overstated
whereas liability and expenses are not under stated.

Consistency According to this principle, the accountant should use the same
methods and functions for different periods of time. For example,
the same rate of percentage should be applied for all
depreciation. This principle is also known as the principle of
regularity.

Materiality Information is material if its omission or misstatement could


influence the economic decisions of users taken on the basis of
the financial statements.

Substance Over Substance over form is an accounting concept which means that
Form the economic substance of transactions and events must be
recorded in the financial statements rather than just their legal
form.

Business Entity Financial accounting is based on the premise that the


transactions and balances of a business entity are to be accounted
for separately from its owners. The business entity is therefore
considered to be distinct from its owners for the purpose of
accounting.

Money Money Measurement Concept in accounting, also known as


Measurements Measurability Concept, means that only transactions and events
that are capable of being measured in monetary terms are
recognized in the financial statements.

1 From the desk of Ghulam Mustafa (FCMA), M.A Economics


Level – I Accounting Concepts & Conventions Fundamentals of Financial Accounting

Historical Cost From an accountant's point of view, the term "cost" refers to the
Convention amount spent (cash or the cash equivalent) when an item was
originally obtained, whether that purchase happened last year or
thirty years ago.

Theory of An accounting concept based on the principle that income is only


Capital recognized after capital has been maintained or there has been a
Maintenance full recovery of costs. Capital maintenance has been reached if the
amount of a company's capital at the end of a period is unchanged
from that at the beginning of the period, with any excess amount
treated as profit.

Current Accounting-measurement showing the effect of inflation on the


Purchasing value of money. To arrive at CPP, historical costs are converted
Power into current prices by using an index such as consumer price
Accounting index (CPI).

Current Cost Current cost accounting values assets at their current


Accounting replacement cost rather than at the price originally paid for them,
the approach taken by historical cost accounting. Current cost
accounts are drawn up by adjusting the historical cost for
inflation and the usual adjustments such those as for
depreciation.

Fair Value Fair value is defined as ‘the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date’.

Value to the Business value expands concept of value of the firm beyond
Business economic value (also known as economic profit, economic value
added, and shareholder value) to include other forms of value
such as employee value, customer value, supplier value, channel
partner value, managerial value, and societal value. Many of these
forms of value are not directly measured in monetary terms.

2 From the desk of Ghulam Mustafa (FCMA), M.A Economics

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