INTRODUCTION
This is the third unit among the units that make up the course — Introduction to Accounting. Any activity that you perform is facilitated if you have a set of rules to guide your efforts. Further, you find that these rules are of more value to you if they are standardised. When you are driving your vehicle, you keep to the right.
You are in act following a standard traffic rule. A similar principle applies to accounting. You should note that accounting is govern by a number of generally accepted concepts and conventions. If you are to understand and use accounting reports, you must be familiar with the rules and conventions behind these reports.
OBJECTIVES
At the end of this unit, you should be able to:
In accounting we make a distinction between businesses and the owner or owners. Every business unit is treated as an entity completely different from the owner. All the records are kept from the viewpoint of the business rather than from that of the owner or owners.
A business is an economic unit separate and apart from the owner or owners. As such, transactions of the business and those of the owners should be accounted for and reported separately. In recording a transaction the important question is how does it affect the business? For example, if the owners of a shop were to take cash from the cash box for their personal use, the accounts would show that cash had been, reduced.even though it does not make any difference to the owners.
The assumption that the business is not expected to be liquidated in the foreseeable future, in fact, establishes the basis for many of the Valuations and allocations in accounting.
For example, depreciation procedures rest upon this concept it is the assumption which underlies the decisions of investors to commit capital to business.
Every transaction involves two entries and these are both recorded in the books of account. For every debit entry, there is a corresponding-credit entry. You will understand this principle better in the next unit. This will enable, you to, understand, the double aspect and effects of a business transaction.
The accrual concept makes a distinction between the receipt of cash and the right to receive it, and the payment of cash and the legal obligation to pay it. In actual business operations, the obligation to pay and the actual movement of cash may not coincide.
This concept holds that profit is made or determined by including revenue and costs and they, are earned or, incurred and not as cash is received or paid. It is not necessarily correct that cash paid and received. During a particular period of time represents the time income and essentially that all transactions are accounted for e.g Electricity enjoyed but not yet paid for.
The resources (land, buildings, machinery, furniture etc.) that a business owns are called assets. The money values that are assigned to assets are derived from the cost concept. This concept states that an asset is worth the price paid for or cost incurred to acquire it.
Thus, assets are recorded at their original purchase price and this cost is the basis for all subsequent accounting for the assets. The assets shown on the financial .statements do, not necessarily -indicate their present market worth or market values. The cost concept does not mean that all assets remain on the accounting records at their original cost for all time. The cost of an asset that has a long but limited life is systematically reduced during its life by a process called depreciation which will be discussed at some length in a subsequent unit.
Convention of Conservatism This convention, also known as the convention of Prudence is often stated as anticipate no profit, provided for all possible losses. This means that an accountant should follow a cautious approach. This is a convention of caution or playing safe and is adhered to while preparing the financial statements. For example, closing stock is valued at cost or market price whichever is lower.
Note that apart from legal requirements, full disclosure of all significant information should be made in the financial statements. For example, the basis of valuation of fixed assets, investments and stock should be clearly stated in the Balance sheet. In other words, accounting statements should be honestly prepared.
Whether something should be disclosed or not in the financial statements will depend on whether it is materials or not materiality depends on the amount involved in the transaction for example minor expenditure of N50 for the purchase of waste basket may be treated as an expenditure of the period rather than as an asset.
Accounting Principles are man made. They are accepted because they are believed to be useful in preparing the accounts of any business enterprise.
The Principle enjoys a wide measure of support of the accounting profession. That is why they are known as Generally Accepted Accounting Principles (GAAP).
This is the third unit among the units that make up the course — Introduction to Accounting. Any activity that you perform is facilitated if you have a set of rules to guide your efforts. Further, you find that these rules are of more value to you if they are standardised. When you are driving your vehicle, you keep to the right.
You are in act following a standard traffic rule. A similar principle applies to accounting. You should note that accounting is govern by a number of generally accepted concepts and conventions. If you are to understand and use accounting reports, you must be familiar with the rules and conventions behind these reports.
OBJECTIVES
At the end of this unit, you should be able to:
- understand the Generally Accepted Accounting Principles (GAAP)
- understand the importance and necessity for uniformity in accounting practices.
Accounting Principles
In unit 2, accounting is referred teas the language of business. To make the language convey the same meaning to all people, Accounts have agreed on a number of concepts and conventions.Accounting Concepts
Below are the number of accounting concepts which the accountants try to follow:Business Entity Concept
In accounting we make a distinction between businesses and the owner or owners. Every business unit is treated as an entity completely different from the owner. All the records are kept from the viewpoint of the business rather than from that of the owner or owners.
A business is an economic unit separate and apart from the owner or owners. As such, transactions of the business and those of the owners should be accounted for and reported separately. In recording a transaction the important question is how does it affect the business? For example, if the owners of a shop were to take cash from the cash box for their personal use, the accounts would show that cash had been, reduced.even though it does not make any difference to the owners.
Going Concern Concept
Accounting assumes that the business will continue to operate for a long time in the future to the contrary. The enterprise is viewed as a going concern, that is, a continuing in operation, at least in the foreseeable future. The owners have no intention to wind up or liquidate its operations.The assumption that the business is not expected to be liquidated in the foreseeable future, in fact, establishes the basis for many of the Valuations and allocations in accounting.
For example, depreciation procedures rest upon this concept it is the assumption which underlies the decisions of investors to commit capital to business.
The Double-Entry Concept
Every transaction involves two entries and these are both recorded in the books of account. For every debit entry, there is a corresponding-credit entry. You will understand this principle better in the next unit. This will enable, you to, understand, the double aspect and effects of a business transaction.
Accrual Concept
The accrual concept makes a distinction between the receipt of cash and the right to receive it, and the payment of cash and the legal obligation to pay it. In actual business operations, the obligation to pay and the actual movement of cash may not coincide.
This concept holds that profit is made or determined by including revenue and costs and they, are earned or, incurred and not as cash is received or paid. It is not necessarily correct that cash paid and received. During a particular period of time represents the time income and essentially that all transactions are accounted for e.g Electricity enjoyed but not yet paid for.
Cost Concept
The resources (land, buildings, machinery, furniture etc.) that a business owns are called assets. The money values that are assigned to assets are derived from the cost concept. This concept states that an asset is worth the price paid for or cost incurred to acquire it.
Thus, assets are recorded at their original purchase price and this cost is the basis for all subsequent accounting for the assets. The assets shown on the financial .statements do, not necessarily -indicate their present market worth or market values. The cost concept does not mean that all assets remain on the accounting records at their original cost for all time. The cost of an asset that has a long but limited life is systematically reduced during its life by a process called depreciation which will be discussed at some length in a subsequent unit.
Accounting Conventions
Convention of Conservatism This convention, also known as the convention of Prudence is often stated as anticipate no profit, provided for all possible losses. This means that an accountant should follow a cautious approach. This is a convention of caution or playing safe and is adhered to while preparing the financial statements. For example, closing stock is valued at cost or market price whichever is lower.
Convention of Full Disclosure
Note that apart from legal requirements, full disclosure of all significant information should be made in the financial statements. For example, the basis of valuation of fixed assets, investments and stock should be clearly stated in the Balance sheet. In other words, accounting statements should be honestly prepared.
Convention of Materiality
Whether something should be disclosed or not in the financial statements will depend on whether it is materials or not materiality depends on the amount involved in the transaction for example minor expenditure of N50 for the purchase of waste basket may be treated as an expenditure of the period rather than as an asset.
SELF-ASSESSMENT EXERCISE
- "Accounting is governed by a number of generally accepted concepts and conventions". List and explain these concepts and conventions.
- Briefly explain the following accounting concepts which are very fundamental to financial accounting:
- Going concern concept;
- Business Entity Concept;
- Accrual concept;
- Dual aspect concept or Double entry concept;
- Cost concept
CONCLUSION
Accounting Principles are man made. They are accepted because they are believed to be useful in preparing the accounts of any business enterprise.
The Principle enjoys a wide measure of support of the accounting profession. That is why they are known as Generally Accepted Accounting Principles (GAAP).
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