INSTITUTE OF ACCOUNTANCY ARUSHA

MODULE NAME : FUNDAMENTALS OF ACCOUNTING /

PRINCIPLES OF ACCOUNTING / ACCOUNTING PRINCIPLES
FIRST YEAR : BFB, BA, BAF, BAIT, BB APPR, BET, BIRM APPR & BAA

TOPIC ONE

INTRODUCTION TO ACCOUNTING

1.1 The Definition of accounting.

Accounting can be defined as ‘the process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by users of the information’. It means is that
accounting involves deciding what amounts of money are, were, or will be involved in transactions (often
buying and selling transactions) and then organising the information obtained and presenting it in a way
that is useful for decision making.

Despite what some people think, accounting is not a branch of mathematics, Accounting may not require
a knowledge of mathematics but you do need to be able to add, subtract, multiply and divide – things you
need to be able to do in your daily life anyway.
Otherwise, you would not know how much money you had with you, how much you would have if you
spent some of it, or whether the change you received was correct. So, let’s remove one big misconception
some people have concerning accounting: you do not need to be good at arithmetic to be good at
accounting, though you will find it easier to ‘do’ accounting if you are.

Accounting began because people needed to:

Record business transactions,to know if they were being financially successful, and to know how
much they owned and how much they owed.
It is known to have existed in one form or another since at least 3,500 BC (records exist which
indicate its use at that time in Mesopotamia). There is also considerable evidence of accounting being
practised in ancient times in Egypt, China, Greece, and Rome. In England, the ‘Pipe Roll’, the oldest
surviving accounting record in the English language, contains an annual description of rents, fines and
taxes due to the King of England, from 1130 to 1830.
However, it was only when Paciloi wrote about it in 1494 or, to be more precise, wrote about
a branch of accounting called, ‘bookkeeping’ that accounting began to be standardised and recognised
as a process or procedure.

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 No standard system for maintaining accounting records had been developed before this because
the circumstances of the day did not make it practicable for anyone to do so there was little point, for
example, of anyone devising a formal system of accounting if the people who would be required to ‘do’
accounting did not know how to read or write.
One accounting scholar (A. C. Littleton) suggested that seven key ingredients which were required before
a formal system could be developed existed when Pacioli wrote his treatise:
• Private property. The power to change ownership exists and there is a need to record the
transaction.
• Capital. Wealth is productively employed such that transactions are sufficiently important to
make their recording worthwhile and cost-effective.
• Commerce. The exchange of goods on a widespread level. The volume of transactions needs
to be sufficiently high to motivate someone to devise a formal organised system that could be
applied universally to record transactions.
• Credit. The present use of future goods. Cash transactions, where money is exchanged for
goods, do not require that any details be recorded of who the customer or supplier was. The
existence of a system of buying and selling on credit (i.e. paying later for goods and services
purchased today) led to the need for a formal organised system that could be applied universally
to record credit transactions.
• Writing. A mechanism for making a permanent record in a common language. Writing had clearly
been around for a long time prior to Pacioli but it was, nevertheless, an essential element required
before accounting could be formalised.
• Money. There needs to be a common denominator for exchanges. So long as barter was used
rather than payment with currency, there was no need for a bookkeeping system based upon
transactions undertaken using a uniform set of monetary values.
• Arithmetic. As with writing, this has clearly been in existence far longer than accounting.
Nevertheless, it is clearly the case that without an ability to perform simple arithmetic, there
was no possibility that a formal organised system of accounting could be devised.

When accounting information was being recorded in the Middle Ages it sometimes simply took
the form of a collection of invoices (which each show the details of a transaction) and receipts (which
each confirm that a payment has been made) which were given to an accountant to calculate the profit
or loss of the business up to some point in time. This practice persists to this day in many small
businesses.
The accountant of the Middle Ages would be someone who had learnt how to convert the
financial transaction data (i.e. the data recorded on invoices and receipts, etc.) into accounting
information. Quite often, it would be the owner of the business who performed all the accounting tasks.
Otherwise, an employee would be given the job of maintaining the accounting records.
As businesses grew in size, so it became less common for the owner to personally maintain the
accounting records and more usual for someone to be employed as an accounts clerk. Then, as
companies began to dominate the business environment, managers became separated from owners –
the owners of companies (shareholders) often have no involvement in the day-to-day running of the
business. This led to a need for some monitoring of the managers. Auditing of the financial records by
accountants became the norm and this, effectively, established the accounting profession.
The first national body of accountants, The Institute of Chartered Accountants of Scotland, was
formed in Scotland in 1854 and other national bodies began to emerge gradually throughout the world,
with the English Institute of Chartered Accountants being formed in 1880 and the first US national
accounting body being formed in 1887.
If you wish to discover more about the history of accounting, you will find that it is readily available
on the World Wide Web. Perform a search on either of the terms ‘history of accounting’ or ‘accounting
history’ and you should find more information than you could ever realistically read on the subject.

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Accounting has many objectives, including letting people and organisations know:
• if they are making a profit or a loss;
• what their business is worth;
• what a transaction was worth to them;
• how much cash they have;
• how wealthy they are;
• how much they are owed;
• how much they owe to someone else;
• enough information so that they can keep a financial check on the things they do.
However, the primary objective of accounting is to provide information for decision making. The
information is usually financial, but can also be given in volumes, for example the number of cars sold in
a month by a car dealership or the number of cows in a farmer’s herd.

1.2 The users of accounting information.

Users of Accounting Information and their Needs
1. Owners
2. Customers
3. Suppliers
4. Managers
5. The Lenders
6. The Government and its agencies
7. The Financial Analyst and Advisors
8. The Employees
9. The Public

Users of Accounting Information and their Needs

The objectives of accounting information directly correlate to the decision-making requirements of the
users. In fact, the needs of the users usually represent the main factors taken into consideration when
designing an accounting information system. This is because the users require the accounting information
to facilitate their decision-making processes and in turn, this serves as the platform on which to set the
guidelines that ensure the uniformity, relevance and accuracy of accounting information and procedure
across different organizations.

We can broadly divide the users of accounting information into two groups – internal users and external
users. Internal users include managers and owners of the business whereas external users include
investors, creditors of funds, suppliers of goods, government agencies, general public, customers and
employees.

Internal users
Internal users use a mix of management and financial accounting information. Some internal users of
accounting information and their needs are briefly discussed below:

1. Management
Management uses accounting information for evaluating and analyzing organization’s financial
performance and financial position, for taking important decisions and appropriate actions to improve
business performance in terms of profitability, financial position and cash flows. As many popular
management accounting books make clear, one of the major roles of management is to set rules and

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procedures to achieve organizational goals. For this purpose, management uses information generated
by financial as well as managerial accounting system of the organization.
The managers are regarded as the agents of the owners of the organizations since they are in charge of
the day-to-day activities of the establishments. They essentially run the organizations through a variety
of managerial functions such as planning and strategy formulation, controlling of activities, organization
of the entity and its staff, human resource administration and directing of the personnel of the
organization. Each of these functions is related to the financial and economic framework of the
organization and thus, the managers and directors require accounting information in order to determine
whether the organization is working towards its objectives(Albassam, 2014).

In case the plans are not achieved, then the managers come up with appropriate measures and make
the relevant decisions that facilitate the firm’s alignment to its targets.

2. Owners
These are the investors in the business and are the parties that are the titleholders to the organization or
institution. Examples of owners include sole traders in single owned entities, partners in partnerships and
shareholders in companies and other forms of corporate bodies(Florin-Constantin, 2012) Their main need
to have on time accounting information regarding the organization is in order to keep track of the financial
performance, economic position and changes in financial position of their organization. This information
will facilitate the assessment of the performance of the managers of the organization in order to evaluate
their efficiency and effectiveness. Furthermore, the information is relevant to the owners in the sense that
it facilitates the determination of whether the business is maximizing profits and wealth or not

External users
External users normally use only financial accounting information. Some external users of accounting
information and their needs are briefly discussed below:

1. Investors
In corporate form of business, the ownership is often separated from the management. Normally investors
provide capital and management runs the business of the entity.

The accounting information is used by both actual and potential investors. Actual investors use this
information to know how their funds are being used by the management and what is the expected
performance of business in future in terms of profitability and growth. On the basis of this information,
they decide whether to increase or decrease their investment in future. Potential investors use accounting
information to decide whether or not a particular corporation is suitable for their investment needs.

2. Lenders
They are the parties that provide alternative capital sources to the organizations. While the owners
provide equity capital, lenders usually provide the organization with debt capital and usually get a return
in the form of interest. Examples of lenders include debenture holders in companies, banks and other
financial institutions that grant loans. The need to have real-time accounting information on the economic
performance and financial position of organizations is in order to assess whether the entities are
sufficiently profitable to pay the interest on loans and whether the organizations possess enough
resources to pay back the principal amount when the amount becomes due(Mintz, 2013).

3. Suppliers
These are the parties responsible for providing the organizations and institutions with the products or
services necessary for operation and sustenance. These supplies may range from raw materials for
manufacture, sundry provisions such as stationery, outsourced services and transportation services

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among others. Usually, suppliers are compensatedeither in cash or in credit basis. Their need for
accounting information comes from the intention to determine whether the organization is capable of
meeting its obligations to pay for the supplies it receives either on the short or long run(Florin-Constantin,
2012). Similarly, the information that confirms this to the suppliers is the capacity of the organizations or
institutions to continue operations as a going concern.

4. Government agencies
Government agencies use financial information of businesses for the purpose of imposing taxes and
regulations.

5. General public
General public also uses accounting information of business organizations. For example, accounting
information is:
a source of education for students of accounting and finance. a source of valuable data for those
researching about organizational impact on individuals and economy as a whole. a source of
information for the people looking for job opportunities. a source of information about the future of a
particular enterprise.

6. Customers
Accounting information provides important information to customers about current position of a business
organization and to make a judgment about its future. Customers can be divided into three groups –
manufactures or producers at various stages of production, wholesalers & retailers, and end users or
final consumers.

Manufacturers or producers at any stage of processing need assurance that the organization in question
will continue providing inputs such as raw materials, parts, components and support etc. The wholesalers
and retailers must be assured of consistent supply of merchandise inventory. The end users or final
consumers are interested in continuous availability of products and related accessories. Because of these
reasons, the accounting information is of significant importance for all three types of customers.

7. Employees
Employees who do not have a hand in core management of the business are considered external users
of accounting information. They are interested in financial information because their present and future
is tied up with the success or failure of the business. The success and profitability of business ensure
job security, better remuneration, job promotion and retirement benefits.

1.3 The difference between Financial Accounting, Cost accounting and

Management accounting
Management accounting is the process of preparing reports about business operations that help
managers make short-term and long-term decisions. It helps a business pursue its goals by identifying,
measuring, analyzing, interpreting and communicating information to managers.

Cost Accounting is a part of management accounting in which we record, examine, summarize, and
study the company’s cost spent on any process, service, product or anything else in the organization.
This helps the organization in cost controlling and making strategic planning and decision on improving
cost efficiency. Such financial statements and ledgers give the management visibility on their cost
information. Management gets the idea where they have to control the cost and where they have to
increase more, which helps in creating a vision and future plan

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Key Differences Between Financial Accounting and Management Accounting
As we have discussed, the basic meaning of the two types of accounting, let’s understand the
difference between financial accounting and management accounting:

Financial Accounting is a discipline that deals with the preparation of financial statements, and
communication of the information to the users. As against, management accounting is all about the
provision of information that is useful to the management, to assist the management in the formulation of
policies and day to day operations for efficient operation of the business.

Financial Accounting uses the monetary records of past financial activities, so it is historically oriented.
As against, management accounting is future-oriented, as it provides both present and future information
in the form of forecasts and budgets which are duly analysed and presented in a detailed manner, so as
to act as a base for management decision making.

Financial Accounting reports only those events which can be described in monetary terms, but non-
monetary events which have a positive or negative impact on the company’s success or failure are
completely ignored. Conversely, management accounting records and reports both financial and non-
financial events, for better decision making. Measures like a number of employees. labour hours, machine
hours and product units are also important for analysis and decision making.

In financial accounting, the reports prepared are mainly used by external users, but internal users also
use them. It reflects how the business enterprise uses resources during a particular period of time.
External users use it for decision-making purposes. However, it is the members of management who use
the reports generated under management accounting.

For the purpose of recording, classifying, summarizing and reporting business transactions, in financial
accounting. Generally Accepted Accounting Principles (GAAPs) are used. Conversely, in the case of
management accounting, there is no such compulsion of using Generally Accepted Accounting Principles
(GAAPs).

Financial Accounting generates information and reports that are public in nature. These are general
purpose financial statements that serve the informational needs of multiple users. It keeps a track of the
financial performance of the entire firm and not just of an individual segment or department. As against,
in management accounting reports are prepared for private use by the company’s management and so
they are confidential. These are specific purpose reports and are meant to determine the performance of
entities, product lines and departments. Data produced comprise facts, estimates, analysis forecasts,
budgets etc.

Financial Accounting looks at the big picture, as it looks at the business as a whole. As against,
management accounting looks at business in segments, commonly known as responsibility centres.
Maintenance of records and preparation of the periodical financial statements, as per the financial
accounting system is compulsory. In contrast, management accounting is optional.

There are a number of differences between cost accounting and financial accounting, which are as
follows:

Audience. Financial accounting involves the preparation of a standard set of reports for an outside

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Format. The reports prepared under financial accounting are highly specific in their format and content,
as mandated by either generally accepted accounting principles or international financial reporting
standards. Cost accounting involves creating reports that can be in any format specified by
management, with the intention of including only that information pertinent to a specific decision or
situation.

Level of detail. Financial accounting primarily focuses on reporting the financial results and financial
position of an entire business entity. Cost accounting usually results in reports at a much higher level of
detail within the company, such as for individual products, product lines, geographical areas,
customers, or subsidiaries.

Product costs. Cost accounting compiles the cost of raw materials, work-in-process, and finished goods
inventory, while financial accounting incorporates this information into its financial reports (primarily into
the balance sheet).

Regulatory framework. The structure of financial accounting reports are tightly governed by either
generally accepted accounting principles or international financial reporting standards. There is no
regulatory framework governing cost accounting reports.

Report content. A financial report contains an aggregation of the financial information recorded through
the accounting system. The information in a cost accounting report can contain both financial
information and operational information. The operational information can come from a variety of
sources that are not under the direct control of the accounting department.

Report timing. Financial accounting personnel issue reports only at the end of a reporting period. Cost
accounting staff may issue reports at any time and with any degree of frequency, depending upon
management's need for the information.

Time horizon. Financial accounting is only concerned with reporting the results of reporting periods that
have already been completed. Cost accounting does this too, but also can be involved in a variety of
projections for future periods.

1.4 The key accounting terms.

(1) Assets
They are resources owned by the organization that aid in income generation process or facilitate
operations. Anything of economic value owned by the organization or an individual is an asset.

Types of assets
Assets are broadly categorized into two, namely:
I. Current assets
II. Noncurrent assets/Fixed assets

Current assets
These are short term assets which have a useful life of only one financial year i.e. current assets benefit
the organization for only one financial year. At the end of the financial/accounting period current assets
are expected to be exhausted or used up.

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However sometimes current assets are carried forward to the subsequent financial year as balances
carried forward. Examples of current assets include, stock/inventory, debtors/accounts receivable, cash
at hand, cash at bank, prepaid expenses etc.

Noncurrent assets/Fixed assets

They are long term assets that can be used or benefit the organization for more than one
accounting/financial period. Their useful life extends beyond one financial year. Some fixed assets last
for two, five, ten etc financial years and others have infinite useful lives. Examples of noncurrent assets
include land, buildings, motor vehicles and other automobiles, furniture and fittings etc.
The distinction between current assets and fixed assets is one financial year. Those that last beyond one
financial year are called fixed assets while those which do not last for more than one financial year are
called current assets.

(2) Liabilities
They are obligations that are to be discharged or repaid. If an organization needs to purchase assets but
cannot afford on its own, it has to borrow money in order to acquire assets. This results into liabilities to
the organization because that borrowed money gives rise to an obligation of repaying the amount.

Types of liabilities
Liabilities are categorized into two:
(1) Current liabilities.
(2) Noncurrent liabilities/long term liabilities.

Current liabilities
They are expected to mature and be discharged within the year of incurring. They are required to be
settled within the financial year. Example include trade creditors/accounts payable, bank over drafts,
accrued expenses, income received in advance/prepaid incomes, one year short term bank loans and
other creditors falling due within one financial year.

Noncurrent liabilities/long term liabilities

These are obligations that require settlement anytime after one financial year. They can be repaid after
two, five, ten, twenty or even more years. They bear interest which depends on the period and amount
involved or other terms. Examples of non current liabilities include, long term bank loans, bonds, and
debentures etc.

(3) Purchases
In accounting purchases occur when goods for resale are bought. Any other purchases not intended for
resale e.g. purchase of fixed assets like land is not treated as a purchase and such entries are not made
to the purchases account.

4) Sales
In accounting, a sale is said to occur when goods which were bought for purpose of resale are sold and
the domain of the business is sell such goods. If the business sells such items that had been bought not
with the purpose of resale e.g. the disposal of an old machine, it is not treated as sales and that
transaction should not be entered into the sales account.

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(5) Returns
In some cases goods which had been bought or sold are returned. If a customer is not satisfied with the
items, he or she can return them to the seller. Goods which had been sold and returned are called returns
inwards or sales returns in the book of the seller. The purchaser in his/her books calls such returned
goods returns outwards or purchases returns. In the trading account, sales returns (returns inwards) are
deducted from sales while returns outwards (purchases returns) are deducted from purchases.

(6) Expenses
They are expired or expended cost. In order to run the business, some costs are incurred e.g. rent,
salaries of the workforce, electricity etc, they are called expenses.

1.5 Accounting concepts / Principles /Conventions

They are defined as basic ground rules that must be followed when financial accounts are being prepared
and presented. They are also referred to as assumptions or prepositions that underlie the preparation
and presentation of financial statements. These concepts/conventions/principles are very many. Some
of these conventions are basic while others are procedural that distinction is however of no consequence.
Hereunder are the concepts/conventions are discussed:

1) Business entity
This concept requires the recognition and recording of transactions relating to the entity (organization) in
question and excludes private transactions of the owners or those running it. Record is only made for
what the entity owes the owner (capital) and what the owner owes the entity (drawings). When an
organization is set up and fully incorporated under the law, it becomes a separate legal person (entity)
capable of transacting on its own and also has the power to borrow and lend.

2) Going concern
This concept states that the business entity is assumed to continue in operational existence in the
foreseeable future. The business is not on the verge of collapse unless there are indications to suggest
so. This assumption is very fundamental to preparation of accounts. Accounts are written on the
assumption and understanding that the business will continue in operation.

This concept makes it possible for accountants to project or prepare estimates for a long period into the
future for example preparing cash flow projections or forecasts for five years or preparing budget
estimates for many years into the future.

3) Historical cost (shorten as cost)

This concept requires accountants to record assets and liabilities at historical cost of their acquisitions.
Assets are recorded at their acquisition (invoice) costs even if the value today is more than historical cost.
The focus of historical cost convention is on recording of assets since there is more temptation of over
valuing assets in the balance sheet in order to portray sound financial stand.

4) Realization
This concept demands that accountants recognize income as earned only when a sale has been made
and the goods have been accepted by the customer or services have been offered and enjoyed by the
customer or where value has been created by the transaction and legal rights and obligations have
resulted.

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5) Accrual
According to this concept, income is recorded as earned even though cash might not been received
provided there is right to income. The portion of income that has not been received is recorded as an
asset (accrued income or debtors). Likewise expense or costs should be recorded and recognized as
incurred although cash might not been paid in respect of those expenses or cost. Incase those expenses
were not paid, they should be recorded as liabilities (accrual or accrued expenses).

6) Matching concept
This concept requires accurate matching of expenses against incomes by writing off only those costs or
expenses that were incurred in generating specific income for the period ended. Cost or expenses paid
should be adjusted for any part period that does not relate to the overall period. For instance if income of
Tshs50,000,000 was earned during a particular financial year and rent of Tshs1,800,000 had been paid
for one and half years, not the whole amount should be written off or subtracted from Tshs50,000,000
because part of the rent is for another financial year. Since rent was paid for 18 months, monthly rent is
Tshs100,000. For one financial year (12 months) the rent is Tshs1,200,000. The correct amount to be
subtracted from Tshs50,000,000 is Tshs1,200,000 and not Tshs1,800,000. The difference of
Tshs600,000 is recorded as prepaid rent.

7) Materiality
Materiality refers to the impact of an omission or misstatement of information in a company's financial
statements on the user of those statements. If it is probable that users of the financial statements would
have altered their actions if the information had not been omitted or misstated, then the item is considered
to be material. If users would not have altered their actions, then the omission or misstatement is said to
be immaterial.
The materiality principle states that an accounting standard can be ignored if the net impact of doing so
has such a small impact on the financial statements that a reader of the financial statements would not
be misled. This definition does not provide definitive guidance in distinguishing material information from
immaterial information, so it is necessary to exercise judgment in deciding if a transaction is material

8) Duality/Dual aspect
It requires a transaction to be recorded twice (dual recording). The dual aspect rule is recognition that
every transaction involves giving and receiving effect. When somebody gives something another must
receive it. The receiving account is debited while the giving account is credited. This is in effect a
requirement for double entry bookkeeping. Double entry means that one account is debited while another
is credited.

9) Monetary/money measurement
According to this concept or convention, all transactions to be recorded must be quantified in monetary
terms or language of money. Money is a common denominator for all transactions. Let alone being an
objective measure, money is also a unit of account and a store of value. This convention assumes money
has stable value over time and it is a source for one of its criticisms.

This concept limits recognition of business transactions to those that can be expressed in monetary
terms. Even where goods are exchanged for goods (barter trade), value must be attached to the items in
question. Whatever cannot be monetized is not recorded. Money is favored because it is an objective
measure.

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10) Conservatism (or prudence)
Preparation of accounts involves estimations, measurements and valuations, according to the
conservatism or prudence concept it is a good practice to follow a procedure that tends to underestimate
things. The concept has two principle rules;

a)An accountant should not anticipate revenues and profits until realized but should provide for all
possible losses. Provision for bad debts are created and written off from profit for this reason. Provisions
are also made for all known contingent liabilities in order to be prudent or conservative.

b)If there are two or methods of valuing an asset, an accountant should choose a method or a base that
leads to lower value. Rules like the lower of cost or market value stems from this concept i.e. you record
an asset either at cost or market value whichever is lower. This would of course contradict with historical
concept which insist that assets to be recorded at historical cost. Let us assume for example, though it
rarely occurs that, market values are lower than the historical costs, the balance sheet would carry the
market values. There would be a direct conflict between conservatism and historical cost concepts.

11) Consistency
It states that once a particular accounting method or base selected and has become accounting policy,
it must be applied continuously or consistently from year to year. Changes in accounting methods or
policies are permitted only if there are justifiable reasons for doing so, for instance if old ones have
become inappropriate for the present circumstances. When a change is made, the effect of the change
on the reported net profit and balance sheet position if material must be disclosed as foot notes in the
accounts.

Many accounting bases are allowed for instance in valuing stock, FIFO, LIFO, weighted average cost etc
may be used and in depreciation of fixed assets, straight line , declining balance, sum of year digits etc
may be applied. What the consistency concept requires is that once management has chosen one of
those methods and has become an accounting policy, it must be applied on a consistency basis.
Switching from one method to another will cause distortion in financial reporting. This will prevent
accurate analysis of a company’s over time. Inter period comparisons and inter company comparisons
will be difficult if some companies keep changing their accounting policies.

12) Periodicity and disclosure

This concept makes financial reporting mandatory and is enshrined in companies’ act of Tanzania and
many other countries. At the end of the accounting period or financial year (may not be a calendar year
but twelve months); a company must prepare and disclose financial statements. Publishing annual
accounts is made an obligation by this concept. Disclosure can be made more than once in a year if the
accountant so wishes. If interim accounts are to be published, it is not discouraged. Non disclosure even
once a year is illegal. All material information must be disclosed, an accountant must not be seen to be
hiding some vital information.

13) Objectivity
It states that whatever figure is recorded in accounting books and financial statements must have a clear
criteria or yardstick for its measurement. Figure must have the basis for arriving at them but not simply
planted into financial statements. Accountant must be able to defend figures in financial statements using
objective evidence, empirical or otherwise. This concept aims at eliminating subjectivity and free
accounting information from bias.

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14) Substance over form
It states that transactions and other events should be accounted for and presented in accordance with
their substance and financial reality and not merely with their legal form. For instance if you buy a motor
vehicle for your business on hire purchase, when you make down payment you can be given the vehicle
to use as you continue making installment payments. The registration book, which is the evidence of
ownership, will not be released to you until you make the last installment payment. The lawyers say that
title passes on fully paying up. The question then is, how do you account for such vehicle, should you
make it off-balance sheet i.e. not to be recorded in your balance sheet? Substance over form gives the
answer as follows: the substance and reality is that you are using the vehicle in your business so it is the
business asset and should be recorded in its books and financial statements. You should stop worrying
about legalities of title passing after all you will complete installment payments and documents of
ownership will be surrendered to you.

15) Relevance
According to this concept the overall message that the accounts are trying to relay may be obscured if
too much information is presented. Accounting statements should contain only information that complies
strictly with the specific requirements of the user. This concept is at time combined with materiality
concept.

1.6 International Accounting Standards (IAS)

International Accounting Standards (IASs) were issued by the antecedent International Accounting
Standards Council (IASC), and endorsed and amended by the International Accounting Standards
Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.

International Accounting Standards (IAS) are older accounting standards issued by the International
Accounting Standards Board (IASB), an independent international standard-setting body based in
London. The IAS were replaced in 2001 by International Financial Reporting Standards (IFRS).

1.7 International Financial Reporting Standard (IFRS)

International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial
statements of public companies that are intended to make them consistent, transparent, and easily
comparable around the world

IFRS standards are International Financial Reporting Standards (IFRS) that consist of a set
of accounting rules that determine how transactions and other accounting events are required to be
reported in financial statements. They are designed to maintain credibility and transparency in the
financial world, which enables investors and business operators to make informed financial decisions.

IFRS standards are issued and maintained by the International Accounting Standards Board and were
created to establish a common language so that financial statements can easily be interpreted from
company to company and country to country

READING ASSIGNMENT
Read on the following concepts
• IAS
• IFRS
• GAAPs
• The advantages and disadvantages of IAS

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