August 15, 2018

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Theory Base of Accounting

ACCOUNTING FOR INCOMPLETE RECORDS



                             Theory Base of Accounting                 

  • Generally Accepted Accounting Principles- GAAP

GAAP may be defines as those rules of action which are derived from experience and practice, and which are accepted as common principles to keep a same track of accounting for all.

 

  • Basic Assumption of Accounting
Accounting Entity Assumption

 

A business will be treated as separate entity from its owners. Proper distinction must be made between personal transaction and business transaction.
Money Measurement Assumption Only those transactions will be recorded which can be expressed in terms of money.
Accounting Period Assumption The periodic life of an enterprise is artificially split in to periodic intervals known as accounting periods.
Going Concern Assumption

(AS-1)

The organisation will run for a foreseeable future. It has been assumes that organisation has neither the intention nor the necessity to of liquidation.



  • Basic Principles of Accounting
Duality

 

Dual aspect principle is the basis for Double Entry System of book-keeping. All business transactions recorded in accounts have two aspects – receiving benefit and giving benefit.
Revenue Recognition According to this concept, revenue is considered as the income earned on the date when it is realised. Unearned or unrealised revenue should not be taken into account.
Historical Cost Under this concept, assets are recorded at the price paid to acquire them and this cost is the basis for all subsequent accounting for the asset.
Matching Matching the revenues earned during an accounting period with the cost associated with the period to ascertain the result of the business concern is called the matching concept.
Full Disclosure Accounting statements should disclose fully and completely all the significant information. Based on this, decisions can be taken by various interested parties.
Objectivity This principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it. For example, cash receipt for payments made.

 

  • Modifying Principles of Accounting
Cost-Benefit Principle states that the cost of applying a principle should not be more than the benefit derived from it. If the cost is more than the benefit then that principle should be modified.
Materiality Principle requires all relatively relevant information should be disclosed in the financial statements. Unimportant and immaterial information are either left out or merged with other items.
Consistency Principle is to preserve the comparability of financial statements. The rules, practices, concepts and principles used in accounting should be continuously observed and applied year after year.
Prudence Principle takes into consideration all prospective losses but leaves all prospective profits. The essence of this principle is “anticipate no profit and provide for all possible losses”.
Matching Revenues earned during an accounting period with the cost associated with the period to ascertain the result of the business concern is called the matching concept.
Full Disclosure Accounting statements should disclose fully and completely all the significant information.
Objectivity Principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it. For example, cash receipt for payments made.

 

  • Qualitative Characteristics of Accounting Information.
Understandability   Relevance
Decision makers vary widely in the types of decisions they make, how they make decisions, the information they already possess or can obtain from other resources, and their ability to process the information. To be relevant to investors, creditors, and others for investment, credit, and similar decisions, accounting information must be capable of making a difference in a decision. Relevant information should have predictive value, feedback value, and timeliness.
Reliability Comparability
Reliability is the quality of information that permits users to depend on it with confidence. This means it is verifiable, has faithful representation, and is reasonably free of errors and bias.

 

Accounting information about an enterprise is extremely useful if it can be compared to accounting information about other enterprises. Comparability results when different enterprises apply the same accounting treatment to similar events.

 

 

                                              

  • Generally Accepted Accounting Principles- GAAP

GAAP may be defines as those rules of action which are derived from experience and practice, and which are accepted as common principles to keep a same track of accounting for all.

 

  • Basic Assumption of Accounting
Accounting Entity Assumption

 

A business will be treated as separate entity from its owners. Proper distinction must be made between personal transaction and business transaction.
Money Measurement Assumption Only those transactions will be recorded which can be expressed in terms of money.
Accounting Period Assumption The periodic life of an enterprise is artificially split in to periodic intervals known as accounting periods.
Going Concern Assumption

(AS-1)

The organisation will run for a foreseeable future. It has been assumes that organisation has neither the intention nor the necessity to of liquidation.

 

  • Basic Principles of Accounting
Duality

 

Dual aspect principle is the basis for Double Entry System of book-keeping. All business transactions recorded in accounts have two aspects – receiving benefit and giving benefit.
Revenue Recognition According to this concept, revenue is considered as the income earned on the date when it is realised. Unearned or unrealised revenue should not be taken into account.
Historical Cost Under this concept, assets are recorded at the price paid to acquire them and this cost is the basis for all subsequent accounting for the asset.
Matching Matching the revenues earned during an accounting period with the cost associated with the period to ascertain the result of the business concern is called the matching concept.
Full Disclosure Accounting statements should disclose fully and completely all the significant information. Based on this, decisions can be taken by various interested parties.
Objectivity This principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it. For example, cash receipt for payments made.

 

  • Modifying Principles of Accounting
Cost-Benefit Principle states that the cost of applying a principle should not be more than the benefit derived from it. If the cost is more than the benefit then that principle should be modified.
Materiality Principle requires all relatively relevant information should be disclosed in the financial statements. Unimportant and immaterial information are either left out or merged with other items.
Consistency Principle is to preserve the comparability of financial statements. The rules, practices, concepts and principles used in accounting should be continuously observed and applied year after year.
Prudence Principle takes into consideration all prospective losses but leaves all prospective profits. The essence of this principle is “anticipate no profit and provide for all possible losses”.
Matching Revenues earned during an accounting period with the cost associated with the period to ascertain the result of the business concern is called the matching concept.
Full Disclosure Accounting statements should disclose fully and completely all the significant information.
Objectivity Principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it. For example, cash receipt for payments made.

 

  • Qualitative Characteristics of Accounting Information.
Understandability   Relevance
Decision makers vary widely in the types of decisions they make, how they make decisions, the information they already possess or can obtain from other resources, and their ability to process the information. To be relevant to investors, creditors, and others for investment, credit, and similar decisions, accounting information must be capable of making a difference in a decision. Relevant information should have predictive value, feedback value, and timeliness.
Reliability Comparability
Reliability is the quality of information that permits users to depend on it with confidence. This means it is verifiable, has faithful representation, and is reasonably free of errors and bias.

 

Accounting information about an enterprise is extremely useful if it can be compared to accounting information about other enterprises. Comparability results when different enterprises apply the same accounting treatment to similar events.

 




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