Accounting Concepts, Principles and Conventions

Basic Assumptions about the Accounting Environment

Business Entity Business entities are separate economic units that control resources and obligations and must have
separate and distinct records from other related parties or entities. (separate or economic entity)
Going Concern There is an assumption that a particular enterprise will continue in existence into the foreseeable
future or a period of time long enough to carry out its objectives and commitments. (continuity)
(Stable) Monetary nit Money is the basic measurement unit. Only items that can be measured in quantifiable terms
specifically !.". dollars are including in the financial statements. #o allowance is made for inflation.
!ualitative Characteristics o" Accounting #n"ormation
$elevance $ccounting information is relevant if it is capable of ma%ing a difference in a decision based on its
predictive value and confirmatory value.
%aith"ul $epresentation $ccounting information is reliable if it measures without bias what it is suppose to measure.
#eutrality and verifiability are prime ingredients of faithful representation
Comparability $ccounting information is comparable if it enables users to identify
& Consistency similarities and differences between two sets of economic events. $ccounting information is
consistent if the same accounting principles and methods are used from one period to the next.
Materiality $ccounting information is material if the judgment of a reasonable user would have changed or
influenced by the omission or misstatement of the information. &t is a company specific measure of
'(elevance). Materiality allows departures from *$$+ where the result would not impact a users
judgment ,decision ma%ing.
Conservatism !ncertainties in accounting are resolved by choosing from alternatives that produces the lowest
asset valuation or lowest reported income.
%ull 'isclosure &nformation that is material to an informed decision ma%er should be disclosed. Material information
would impact the user-s decisions.
Measurement Principles
(istorical Cost General $ule) .istorical cost is the primary valuation method used in financial statements. $ssets
are recorded at their acquisition cost and are generally not adjusted for increases or decreases in
value. /xceptions0 The 1air 2alue method of valuing assets has become increasingly popular.
There are 3 levels of fair value. $ssets are also valued at net reali4able value. (mixed-attribute)
%air *alue 5ertain assets and liabilities are measured and presented at their fair values on the financial
statements. There are 3 levels of fair values measures 6 the measure used must be disclosed.
Generally Accepted Accounting Conventions
+ime Period $lthough a business enterprise is assumed to have an indefinite life financial statement
measurements 7 financial position and operations results are based on relatively short intervals such
as quarterly or yearly. (periodicity)
Matching /xpenses are recogni4ed in the same period as the revenues they helped generate. The result is
the best measure of net income or loss for the period as all expenses used to generate revenues are
recorded or matched in the same period.
$evenue *eneral (ule0 (evenue is recogni4ed for accounting purposes when
$ecognition goods are delivered or services performed. /xceptions0 &n some cases revenue is recogni4ed
before or after the delivery of goods or the performance of services.
Substance ,ver %orm $ transaction should be accounted for based on the underlying economic substance not its legal
form.
Industry Practice Deviations from normal GAAP practices occur in some industries. The two most common reasons
are (1) generalied rules would not produce meaningful information (!) to comply with regulatory
accounting re"uirements. Guidance is provided for what is #GAAP$ in these circumstances.
.Copyright 2014 Ruben Davila