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Presented By Group: A Department of BBA Fakrul Abdein 110170200 Jakir Khan 110170201 Shahriar Khan Lodhi 110170202 Sheikh Amranul Islam Ridoy 110170203 Northern University Bangladesh
Accounting PrinciplesAs indicated in the Feature Story, it is important that companieshave general guidelines available to resolve accounting issues.Without these basic guidelines, each company would have todevelop its own set of accounting practices. If thishappened, we would have to become familiar with everycompany’s peculiar accounting and reporting rules in order tounderstand its financial statements. It would be almostimpossible to compare the financial statements of differentcompanies. This chapter explores the basic accountingprinciples that are followed in developing specific accountingguidelines. The content and organization of AccountingPrinciples are as follows.
Accounting Principles Constraints inAssumptions Principles Accounting • Monetary • Revenue • Materiality unit recognition • Economic • Matching • Conservatism entity • Time • Full period disclosure • Going • Cost concern
AssumptionsThe monetary unit assumption states that only transactiondata that can be expressed in terms of money be included inthe accounting records.Example A company does not report the value of the companypresident in its financial records because that value cannotbe expressed easily in dollars. An important corollary to themonetary unit assumption is the assumption that the unit ofmeasure remains relatively constant over time. We will discussthis point in more detail later in this chapter. E T H I C S N O T EIn an action that sent shock
Economic Entity AssumptionThe economic entity assumption states that the activities of theentity be kept separate and distinct from the activities of theowner and of all other economic entities.Example It is assumed that the activities of IBM can be distinguishedfrom those of other computer companies such asApple, Dell, and Hewlett-Packard. Alcatel-Alsthom was takenintocustody for an apparent violation of the economic entityassumption. Allegedly, the executive improperlyused company funds to install an expensive security
Time Period AssumptionThe time period assumption states that the economic life of abusiness can be divided into artificial time periods. Thus, it isassumed that companies such as General Electric, TimeWarner, and ExxonMobil, can subdivide their businessactivities into months, quarters, or a year for meaningfulfinancial reporting purposes.
Going Concern Assumption Financial statements are prepared assuming that thecompany is a going concern which means that the companyintends to continue its business and is able to do so.The status of going concern is important because if thecompany is a going concern it has to follow the generallyaccepted accounting standards.The auditors of the company determine whether the companyis a going concern of not at the date of financial statements.
Examples• An oil and gas firm operating in Nigeria is stopped by theNigerian court from carrying out operations in Nigeria that firm isnot a going concern in Nigeria, because it has to shut down.• A bank is in serious financial troubles and the government isnot willing to bail it out. The Board of Directors has passed aresolution to liquidate the business. The bank is not a goingconcern.• A merchandising company has a current ratio below 0.5. Acreditor $1,000,000 demanded payment which the companycould not make. The creditor requested the court to liquidatethe business and recover his debts and the court grants theorder. The company is no longer a going concern.• A nationalized refinery is in cash flows problems but thegovernment of the country provided a guarantee to therefinery to help it out with all payments, the refinery is a goingconcern despite poor financial position.
PRINCIPLESRevenue recognition principle tells that revenue is to be recognized onlywhen the rewards and benefits associated with the items sold or serviceprovided is transferred, where the amount can be estimated reliability andwhen the amount is recoverable.Accrual basis of accounting is used in recognizing revenue which tells thatrevenue is to be recognized ignoring when the cash inflows occur.Examples1.A telecommunication company sells talk time through scratch cards. Norevenue is recognized when the scratch card is sold, but it is recognizedwhen the subscriber makes a call and consumes the talk time.2.A monthly magazine receives 1,000 subscriptions of $240 to be paid at thebeginning of the year. Each month it recognizes revenue worth $20,000[$240/12*1,000].3.A media company recognizes revenue when the ads are aired even if thepayment is not received or where payment is received in advance.
In order to reach accurate net income figure the expensesincurred in earnings revenues recognized in a time periodshould be recognized in that time period and not in the nextor previous. This is called matching principle.Examples1.$2,000,000 worth of sales are made in 2010. Total purchasesof inventory were $1,000,000 of which $100,000 remained onhand at the end of 2010. The cost of earnings is $2,000,000revenue is $900,000 [$1,000,000 minus $100,000] and thisshould be recognized in 2010 thereby yielding a gross profit of$1,100,000.2.A hospital pays $20,000 per month to 5 of its doctors.Monthly sales are $500,000. $100,000 worth of monthly salariesshould be matched with $500,000 of revenue generated.
Full disclosure principle is relevant to materiality concept. It requires thatall material information has to be disclosed in the financial statementseither on the face or in the notes to the accounts.Examples1.Accounting policies need to be disclosed because they helpunderstand the basis of accounting.2.Details of contingent liabilities, contingent assets, legal proceedings,etc. are also relevant to the decision making of users and hence needto be disclosed.3.Significant events occurring after the date of the financial statementsbut before the issue of financial statements (i.e. events after thebalance sheet date) need to be disclosed.4.Details of property, plant and equipment cannot be presented on theface of balance sheet, but a detailed schedule outlining movement incost and accumulated depreciation should be presented in the notes.5.Tax rate is expected to change in near future. This information needsto be disclosed.
COST PRINCIPLE COST PRINCIPLE is the principle where a company is obligedto record its fixed assets at their actual purchase price orproduction cost. Financial statements are prepared to help the users with theirdecisions. Hence, all such information which has the ability to affect thedecisions of the users of financial statements is material and this propertyof information is called materiality.In deciding whether a piece of information is material or not requiresconsiderable judgment. Information is material either due to the amountinvolved or due to the importance of the event.Examples1.The government of the country in which the company operates inworking on a new legislation which would seriously impair the companysoperations in future. Although there are no figures involved but theimpact is so large that disclosure is imminent.2.The remuneration paid to the executives and the directors is material.3.The accounting policies are material because they help the usersunderstand the figures.
ConservatismA branch of accounting that requires a high degree of verification beforemaking a legal claim to any profit. Accounting conservatism willrecognize all probable losses as they are discovered and mostexpenditures as they are incurred. Revenue will be deferred until it isverified. Having strict revenue-recognition criteria is one of the mostcommon forms of accounting conservatism.