Basic Underlying Accounting

Principles
 Revenue Recognition
 Persuasive evidence of an arrangement
exists.
 Delivery has occurred or services have
been rendered
 The seller’s price to the buyer is fixed
 Collectibility is reasonably assured
Basic Underlying Accounting
Principles
 The Matching Concept
 Requires that revenue and expenses
related to generating the corresponding
revenue be recorded in the same period.
 As a sale is made, the appropriate
charges for COGS or other expenses
should be consistent from one accounting
period to the next.
Basic Underlying Accounting
Principles
 Historical Cost
Is the proper basis for the recording of
assets, expenses, equity, etc.
 Full Disclosure

The financial statements of a firm must

include all information necessary for the
formation of valid decisions by the users.
Basic Underlying Accounting
Principles
 Consistency
 Firms must employ consistent accounting
procedures from period to period.
 Variations or changes in accounting policy
and procedures must be justifiable.
 Standards used to value inventory,
depreciate assets, or accrue expenses
must be consistent from one accounting
period to the next.
Basic Underlying Accounting
Principles
 Objectivity
 Accounting records must be designed and
kept on objective rather than subjective
evidence.
 Underlying verifiability must exist for the
information contained in the financials.
 The historical cost must be verifiable
through legitimate proof of purchase.
Basic Underlying Accounting
Principles
 Separate Entity Assumption

 Economic activity of an entity must be kept

separate from other personal or business
entities
Basic Underlying Accounting
Principles
 Going Concern – Continuity Assumption
 There is an assumption that the life of an
entity will be long enough to fulfill its
financial and legal obligations.
 Any evidence to the contrary must be
reported in the financial statements of an
entity.
Basic Underlying Accounting
Principles
 Unit of Measure
 All financial reports are based on the
monetary unit of the firm’s home country.
 Adjustments for inflationary trends are not
shown in the financial statements of the
entity.
Basic Underlying Accounting
Principles
 Periodicity – Time Period Assumption
 The life of an entity is divided into short
economic time periods on which reporting
statements are fashioned
Departures from GAAP
Modifying Conventions
Variations from GAAP are sometimes
required. The following modifying
conventions give guidance and must be
considered when departing from what is
generally acceptable.
Modifying Conventions
 Conservatism
 When considering an accounting matter in
which there are two alternatives that
equally satisfy conceptual and
implementation principles for a transaction
the accountant must take the conservative
approach, and follow the alternative that
will have the least favorable impact on the
net income of the entity.
Modifying Conventions
 Industry Practices & Peculiarities
The peculiarities and practices of an
industry
(such as banking, investment, insurance
etc)
May warrant selective exceptions to
accounting principles . Some differences in
Accounting also occur in response to legal
requirements.
Modifying Conventions
 Substance over form
The economic substance of a transaction
determines the accounting treatment , even
when the legal aspects of the transaction
indicate otherwise.
Example : lease contract
Modifying Conventions
 Application of Judgment
An accountant may depart from GAAP if the
results of departure appear reasonable
under the circumstances, especially when
the strict adherence to GAAP will produce
unreasonable results.
Modifying Conventions
 Materiality

The amount of an item is material if its

omission would affect the judgment of a
Reasonable person who is relying on the
financial statements.