Accounting and Finance -Unit 02


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Accounting and Finance -Unit 02

  2. 2. OBJECTIVES  Discuss various accounting concepts  Define accounting principles  Describe the concept of accounting standards  Explain the process of setting standard  Discuss the significance of accounting standards
  3. 3. INTRODUCTION The financial statements are used by a number of users, both within and outside an organization, such as owners, investors, and government. As the types of users are diverse, it becomes necessary to formulate the accounting concepts and principles to maintain uniformity in the financial statement. This helps in making the accounting information meaningful, reliable, and comparable for the users. GAAPs are the set of rules and procedures of accounting that are widely accepted. It constitute basic rules that define the parameters and constraints within which accounting operates.
  4. 4. CONCEPTS OF ACCOUNTING Accounting concepts are general rules or assumptions made while preparing the financial statements. These concepts help the internal and external users to understand and interpret the accounting information similarly.  Business Entity Concept: According to this concept business is treated as a separate unit or entity which is distinct from its owners, creditors, managers and other stakeholders.  Dual Aspect Concept: According to this concept every transaction has a two-fold effect namely receiving and giving.  Going Concern Concept: Is based upon the assumption that an organization would not be ceased or liquidated in the immediate future and continues to operate for an indefinite period.
  5. 5. CONCEPTS OF ACCOUNTING (CONTD.)  Accounting Period Concept: Assumes that the entire business tenure should be divided into equal segments to study and analyze the results properly, and at the end of each accounting period various financial.  Money Measurement Concept: Underlines the fact that only those transactions and events would be recorded in the books of accounting that are financial in nature  Cost Concept: Ensures that the assets are measured as per the price paid (cost incurred) to acquire them, which includes- cost of acquisition, transportation and installation.
  6. 6. CONCEPTS OF ACCOUNTING (CONTD.)  Verifiable Objective Evidence Concept: States that the recording of business transactions should be done in an objective manner and should be free from biases.  Realization Concept: Assumes that an organization should determine the time when the revenues are earned or expenses are incurred.  Accrual Concept: According to this revenues or expenses are recorded when they are earned or incurred, and not when cash is paid or received by an  Disclosure Concept: Involves that accounts must be prepared honestly and all the facts associated must be fully disclosed.
  7. 7. CONCEPTS OF ACCOUNTING (CONTD.)  Materiality Concept: Emphasizes the inclusion of only the important details with the material and ignoring the insignificant details, which are not required for accounting.  Consistency Concept: Accounting practices and methods remain unchanged from one accounting period to another.  Conservatism Concept: According to this recording the financial transactions in the books of accounting by taking into consideration all prospective losses and ignoring all prospective profits.
  8. 8. DEFINING ACCOUNTING PRINCIPLES According to the American Institute of Certified Public Accountants (AICPA): “Principles of Accounting are the general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice.” Features of Accounting Principles:  Flexible: Implies that the accounting principles are not rigid; they can change as per the requirement of business  Generally accepted: It implies that a standard framework should be used for recording, summarizing, and reporting the financial transactions.
  9. 9. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES  GAAP is a generally accepted codification of preparing and presenting the business incomes, expenses, assets, and liabilities of the organization, through various financial statements.  According to the AICPA, “Generally accepted accounting principles incorporate the consensus at any time as to which economic resources and obligations should be recorded as assets and liabilities, which changes in them should be recorded, how the recorded assets and liabilities and changes in them should be measured, what information should be disclosed and which financial statements should be prepared”.
  10. 10. CHARASTERISTICS OF GAAP  Simple guidelines: Implies that the accounting principles are simple and man-made guidelines, derived from past experiences.  Ensure uniformity: Implies that the accounting principles are set for ensuring uniformity and meaningful presentation of the accounting information, which can be understood by the users.  Relevance: Depicts that the accounting principles are relevant to the extent that the accounting information presented after following these principles is meaningful and useful for the users.  Objectivity: Implies that the accounting principles are not influenced by the personal bias or judgment of those who have formulated them.  Feasibility: Refers to the extent to which the accounting principles can be implemented without complexity and incurring any cost.
  11. 11. ACCOUNTING STANDARDS  Accounting Standards can be defined as the written statements issued regularly by accounting institutions.  These standards are used to hard code the accounting principles that have been generally accepted widely.  These are the set of guidelines used to prepare and present the financial statements, which help in bringing consistency in the reporting of accounting information.  Accounting Standards can be defined as the written statements issued regularly by accounting institutions, which are used to hard code the accounting principles that have been generally accepted widely.
  12. 12. SIGNIFICANCE OF ACCOUNTING STANDARDS  Provide a framework to produce reliable and standardized financial statements.  Promote proper and timely dissemination of the financial information to the management, investors and other interested users and create a sense of confidence among them.  Ensure transparency, consistency, and comparability of accounting information.  Take into consideration the business environment and laws of a country.  Applicable to all types of businesses irrespective of their industry and size.  Provide flexibility by facilitating an organization to freely adopt any of the practices with a suitable disclosure.
  13. 13. FUNCTIONS OF ACCOUNTING STANDARDS  Improving credibility and reliability of financial statements.  Accounting standards determine the regulations and corporate accountability, which helps to assess the managerial skills in maintaining and improving the profitability, liquidity and solvency.  Accounting professionals get guidance through these accounting standards, which help them to prepare and audit the financial statements
  14. 14. PROCESS OF SETTING ACCOUNTING STANDARDS Procedure adopted by ASB involves:  Determining the board for issuing accounting standards and listing them according to priority.  Seeking assistance of various study groups to formulate standards. These groups prepare the preliminary drafts of accounting standards according to the topics assigned to them.  Issuing the draft of the standards, as an Exposure Draft for inviting comments by the members of institutes and public at large, after considering the views of associations.  Considering the comments on the exposure draft, and then preparing a final draft to be submitted to the council of the institute
  15. 15. SUMMARY  Financial Statements refer to the books of accounts where all financial transactions are recorded to show the profit and loss and the financial position of a business for a particular duration.  Accounting concepts are general rules or assumptions made while preparing the financial statements.  GAAP is a generally accepted codification of preparing and presenting the business incomes, expenses, assets and liabilities of organization through financial statements. © Dreamtech Press