1. Conceptual Framework
• Separate business entity
• Business Vs. Business-man
• Entity Vs. Organization
• Money measurement
y
• Every transaction is recorded in single currency only
Limitations
1. Money doesn’t provide stable unit of measurement
2. All transactions can not be expressed in money terms
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2. Conceptual Framework
• Going concern
• Neither intention nor need to dissolve business
• Business will remain solvent & operate indefinitely
Implications
• Assets are valued at historical cost, not realizable value
• p
Accrual basis is adopted
• Distinction b/w capital and revenue expenses
• Cost allocation, depreciation
• Tentativeness of reporting
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3. Conceptual Framework
• Accounting period
• Financial, calendar, quarter or any other
q y
• Dual aspect
• Transactions are recorded in such a manner that
maintains
Capital + Liability = Assets
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4. Conceptual Framework
• Cost
• Recorded at acquisition cost (
q (historical cost)
)
Advantages
1. No need to ascertain mkt value of the asset all the reporting time
2.
2 More objective to record than market value
M bj ti t d th k t l
3. Allows cost to be deferred
• Accrual
Revenues are recognized in the period in which they are
earned whether received or not
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5. Revenue Recognition
Revenue can be recognized if:
1. It is measurable
2. The completion of earning process has happened
3. There is no uncertainty as to collection of revenue
y
The earning process is normally complete if the goods are sold or services
are rendered.
a) Long term services and contracts:
on the basis of percentage of completion of work method
b) When goods are sold in sellers Mkt. :
on the completion of the production if goods can be sold at a
predetermined price with negligible risk
c) If the ultimate collectivity is in doubt the revenue is recognized only when it is
actually received.
y
doctors , lawyers and sales on installment basis.
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6. Matching Cost Concept
Cost allocation for current and future period in order to
provide proper matching of expenses incurred with revenue
1. Cost hi h
1 C which can be directly associated with the revenues
b di l i d ih h
earned :- COGS, commission on sales
2. Cost which can not be directly related to revenues but can
be associated with accounting period :- Depreciation
3. Cost which cannot be directly associated with revenues
and which do not provide any benefit for future
d hi h d id b fi f f
accounting periods:- rent, telephone bill, supervisors
salaries, etc.
,
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7. Other concepts
• Consistency
The same accounting policies and procedures should be followed
by a single entity unless there is a sound reason to change that
but material effects of such change should be disclosed.
 It helps intra firm comparisons
• Prudence
Anticipate no profits but provide for all possible losses
• Full disclosure
The financial statements and accompanying notes should contain
full di l
f ll disclosure of all significant financial information
f ll i ifi t fi i li f ti
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8. Materiality
• The focus of accounting should be material
items and the scarce resources should not be
wasted in proper recording of immaterial items
Immaterial : the amount is too small to have significant
g
impact on the financial reports
Material : the amount which has significant impact on the
overall picture of the firm
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