Basic Underlying Accounting Principles

Revenue Recognition Persuasive evidence of an arrangement

exists. Delivery has occurred or services have

been rendered The seller’s price to the buyer is fixed Collectibility is reasonably assured

Basic Underlying Accounting Principles

The Matching Concept Requires that revenue and expenses

related to generating the corresponding revenue be recorded in the same period.

As a sale is made, the appropriate charges for COGS or other expenses should be consistent from one accounting period to the next.

Basic Underlying Accounting Principles

Historical Cost

Is the proper basis for the recording of

assets, expenses, equity, etc. Full Disclosure

The financial statements of a firm must

include all information necessary for the

formation of valid decisions by the users.

Basic Underlying Accounting PrinciplesConsistency Firms must employ consistent accounting

procedures from period to period. Variations or changes in accounting policy and procedures must be justifiable. Standards used to value inventory,

depreciate assets, or accrue expenses must be consistent from one accounting period to the next.

Basic Underlying Accounting Principles

Objectivity Accounting records must be designed and

kept on objective rather than subjective evidence.

Underlying verifiability must exist for the information contained in the financials.

The historical cost must be verifiable through legitimate proof of purchase.

Basic Underlying Accounting Principles

Separate Entity Assumption

Economic activity of an entity must be kept separate from other personal or business entities

Basic Underlying Accounting Principles

Going Concern – Continuity Assumption There is an assumption that the life of an

entity will be long enough to fulfill its financial and legal obligations.

Any evidence to the contrary must be reported in the financial statements of an entity.

Basic Underlying Accounting Principles

Unit of Measure All financial reports are based on the

monetary unit of the firm’s home country. Adjustments for inflationary trends are not

shown in the financial statements of the entity.

Basic Underlying Accounting Principles

Periodicity – Time Period Assumption The life of an entity is divided into short

economic time periods on which reporting statements are fashioned

Departures from GAAPModifying Conventions

Variations from GAAP are sometimes required. The following modifying conventions give guidance and must be considered when departing from what is generally acceptable.

Modifying Conventions

Conservatism When considering an accounting matter in

which there are two alternatives that equally satisfy conceptual and implementation principles for a transaction the accountant must take the conservative approach, and follow the alternative that will have the least favorable impact on the net income of the entity.

Modifying Conventions

Industry Practices & Peculiarities

The peculiarities and practices of an industry

(such as banking, investment, insurance etc)

May warrant selective exceptions to

accounting principles . Some differences in

Accounting also occur in response to legal

requirements.

Modifying Conventions

Substance over form

The economic substance of a transaction

determines the accounting treatment , even

when the legal aspects of the transaction

indicate otherwise.

Example : lease contract

Modifying Conventions

Application of Judgment

An accountant may depart from GAAP if the

results of departure appear reasonable

under the circumstances, especially when

the strict adherence to GAAP will produce

unreasonable results.

Modifying Conventions

Materiality

The amount of an item is material if its

omission would affect the judgment of a

Reasonable person who is relying on the

financial statements.