Accounting Bases, Policies and Concepts
TOPIC 1: ACCOUNTING BASES, POLICIES, AND CONCEPTS
ACCOUNTING BASES
- These are the methods used for applying fundamental accounting concepts to financial transactions and items, preparing financial accounts, determining the accounting periods in which revenue and costs should be recognized in the profit and loss account, and determining the amounts at which material items should be stated in the balance sheet.
- Examples of accounting bases include:
Methods of calculating depreciation
Methods of stock valuation
Methods of foreign currency translation
Methods of financial reporting
ACCOUNTING POLICIES
- The principles, bases, conventions, rules and procedures adopted by management / company in preparing and presenting financial statements
Generally Accepted Accounting Principles (GAAP)
- Are widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as circulated by the financial accounting standards board
ACCOUNTING CONCEPTS
- These are fundamental assumptions that underlie the preparation of the financial statements. - Only departure from the said concepts should be disclosed. The concepts are:
Going concern concept
- It is assumed that the business will continue in operation in the foreseeable future and it has no intention of closing down or curtailing the scale of its operations
- It implies that the business will continue to operate in the foreseeable future.
Foreseeable future should at least be a period exceeding 12 months.
- This concept requires that assets should be measured at their historical cost. If the management of the entity believes that their business will not operate up to a foreseeable future then the assets should be measured at the break up basis, i.e. at net selling price.
- Its application includes: o When the business enters into long term contracts with third parties o When non – current assets are depreciated over the estimated useful life o Preparation of long term budgets
Accrual
ACCOUNTING BASES
- These are the methods used for applying fundamental accounting concepts to financial transactions and items, preparing financial accounts, determining the accounting periods in which revenue and costs should be recognized in the profit and loss account, and determining the amounts at which material items should be stated in the balance sheet.
- Examples of accounting bases include:
Methods of calculating depreciation
Methods of stock valuation
Methods of foreign currency translation
Methods of financial reporting
ACCOUNTING POLICIES
- The principles, bases, conventions, rules and procedures adopted by management / company in preparing and presenting financial statements
Generally Accepted Accounting Principles (GAAP)
- Are widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as circulated by the financial accounting standards board
ACCOUNTING CONCEPTS
- These are fundamental assumptions that underlie the preparation of the financial statements. - Only departure from the said concepts should be disclosed. The concepts are:
Going concern concept
- It is assumed that the business will continue in operation in the foreseeable future and it has no intention of closing down or curtailing the scale of its operations
- It implies that the business will continue to operate in the foreseeable future.
Foreseeable future should at least be a period exceeding 12 months.
- This concept requires that assets should be measured at their historical cost. If the management of the entity believes that their business will not operate up to a foreseeable future then the assets should be measured at the break up basis, i.e. at net selling price.
- Its application includes: o When the business enters into long term contracts with third parties o When non – current assets are depreciated over the estimated useful life o Preparation of long term budgets
Accrual