Ch.

2b Accounting QC’s & Assumptions

Objectives of the lesson
• To cover the 6 qualitative characteristics that
feature in the U1-4 course as well as the 4
assumptions & to outline how these impact the
treatment of financial information
 6 Qualitative Characteristics
The qualitative characteristics have been development by the accounting
profession to provide guidelines on the manner in which accounting reports are
prepared.
An acronym to help you remember these are TURF VC(no E)
• Timeliness
• Understandability
• Relevance
• Faithful representation
• Comparability
• Verifiability
 Timeliness
Study design definition: having information available to decision-makers in time
to be capable of influencing their decisions.
• Having information available sooner, rather than later, can enhance its
capacity to influence decisions, and a lack of timeliness can rob information
of its potential usefulness.
• Generally, the older the information, the less useful it is.
In practice: reports should be prepared/ made available shortly after the end of
a reporting period to aid decision making.
 Understandability
Study design definition: Understandability requires financial information to be
comprehensible to users with reasonable knowledge of business and economic
activities.
• To be understandable, information should be presented clearly and
concisely.
In practice: non-accounting people should be able to interpret accounting
reports without needing experts to guide them.
 Relevance
Study design definition: Relevant information is capable of making a difference
to the decisions made by users.
• Relevance requires financial information to be related to an economic
decision.
• Information is relevant to a decision if it helps users to form predictions
about the outcomes of past, present or future events, and/or confirms or
changes their previous evaluations by providing suitable feedback .
In practice: Accountants need to ensure that all relevant information is included
in reports e.g. adjustments for depreciation, bad debts, sales returns, etc.
 Faithful representation
Study design definition: The information reported must be a faithful
representation of the real-world economic event it represents.
• The user is assured that the information presented is complete, free from
material error and neutral (without bias).
In practice: Accountants need to avoid the use of estimations and opinions in
the preparation of the reports.
 Comparability
Study design definition: Comparability is the qualitative characteristic that
enables users to identify and understand similarities in, and differences among,
items.
• Information about an entity is more useful if it can be compared with similar
information about other entities and with similar information about the same
entity for another period or another date.
In practice: The reports should be prepared in a similar format to similar entities
e.g. the use of classifications (operating, investing and financing activities in the
cash flow statement) and the business should be consistent in its approach for
calculating experiences/ revenue e.g. use the same depreciation method each
year.
 Verifiability
Study design definition: Verifiability means
the ability to ensure that different
knowledgeable and independent observers
can reach a consensus (arrive at the same
conclusion) that a particular depiction of an
event is faithfully represented.
• Verifiability is maintained by retention of
source documents used to record the
transaction and checked through
auditing.
• The purpose of verifiability is to hold the
accounting professional accountable for
their work.
In practice: Source documents are retained
so that financial events can be checked
against these documents in order to ‘verify’
 4 Accounting Assumptions
The accounting assumptions – which have been developed over time provide
guidelines on how we record financial information
An acronym to help you remember these are GAPE
• Going concern
• Accrual basis
• Period
• Entity
 Going assumption
Study design definition: Financial reports are prepared on the assumption that
the existing entity will continue to operate into the future. It is assumed that the
entity will not be wound up in the near future but will continue its activities.
In practice: This guides the way we treat assets and liabilities as we will
assume that these economic resources/ sacrifices will either be converted into
cash or settled at some time in the future which guides the way we record and
the report these items.
 Accrual basis assumption
Study design definition: Under the accrual basis of
accounting, revenue is recognised in the period in
which the expected inflow of economic benefits
can be measured in a faithful and verifiable
manner, that is, revenue is recognised when it is
earned.
Expenses are recognised when the consumption
of goods and services can be measured, that is,
expenses are recognised when they are incurred.
Accrual basis profit for an accounting period is
determined by subtracting expenses incurred for a
period from revenue earned in that same period.
In practice: This complements the period
assumption, but it more specific i.e. inventory on
hand is classified as a current asset and the
revenue earned from the inflated sale price and
the expense incurred in terms of the outflow of the
inventory are not recorded until that inventory is
sold to a customer.
 Period assumption
Study design definition: Reports are prepared for a particular period of time,
such as a month or a year, in order to obtain comparability of results.
• Profit determination involves a process of recognising the revenue for a
period and deducting the expenses incurred for that same period.
• A distinction can be made between assets, which will provide benefit to
future reporting periods, and expenses that are totally consumed within one
reporting period.
In practice: This guides the treatment of expenses (which have been consumed
within a reporting period) and assets which will provide an economic benefit
into the next reporting period.
 Entity assumption
Study design definition: The records of assets, liabilities and business activities of the entity
are kept completely separate from those of the owner of the entity as well as from those of other
entities.
• A separate set of accounting records is maintained foreach entity, and the financial statements
prepared provide information on that entity only.

In practice: This guides the recording and reporting of owner’s contributions to

the business which is identified as CAPITAL & classified as OE section of the
B/sheet and likewise when the owner takes an asset out of the business for
personal use, this is recorded & reported as DRAWINGS (also classified as
O.E)