Accounting concepts Flashcards
What is the need for accounts to achieve a ‘true and fair’ view of the business
the need for transparency and accountability in business operations, the requirement for accurate financial reporting, and the desire for fair and equal treatment of stakeholders.
What is the need to comply with Generally Accepted Accounting Practice (GAAP)
The need to comply with Generally Accepted Accounting Principles (GAAP) is driven by the desire for a standardized and uniform approach to financial reporting. GAAP is a set of guidelines and standards for financial accounting and reporting that have been developed by professional accounting organizations. The purpose of GAAP is to ensure that financial statements are consistently prepared and presented in a manner that accurately reflects the financial position and performance of a company.
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Consistency
refers to the principle that requires a company to use the same accounting methods from one period to the next. This principle is based on the idea that financial statements should be comparable over time and that changes in accounting methods should only be made for valid reasons.
Going concern
assumes that a company will continue to operate into the future and will be able to meet its obligations as they become due. This means that financial statements should be prepared on the assumption that the company will continue to trade, unless there is evidence to the contrary.
Accruals (matching)
The accruals convention is an accounting principle that requires financial statements to reflect the effects of transactions and events that have taken place, even if the cash flow effects have not yet been realized. This means that financial statements should reflect the economic reality of a company’s transactions, rather than just its cash flows.
Materiality
accounting principle that requires that only transactions and events that are significant in size or impact should be recognized and disclosed in the financial statements. This means that financial statements should not include every trivial or insignificant transaction or event, as it could distract from the more important information and make the financial statements difficult to understand.
Objectivity
The objectivity convention is an accounting principle that requires financial statements to be based on reliable and verifiable evidence. This means that financial statements should be free from bias and subjective judgment, and should be prepared in a consistent and neutral manner.
Prudence(conservatism )
also known as the conservatism convention, is an accounting principle that requires financial statements to be prepared in a cautious and prudent manner. This means that financial statements should reflect the worst-case scenario and not overstate the value of assets or the amount of profits.
Realisation
an accounting principle that requires revenue to be recognized in the financial statements only when it has been earned and is no longer dependent on future events. This means that revenue should not be recognized until the sale has been completed, the goods have been delivered, and the customer has paid
apply accounting conventions to a business
Materiality: Identify transactions and events that are significant in size or impact and include them in the financial statements. Ignore transactions and events that are trivial or insignificant. Determine the materiality threshold based on the size and complexity of the business.
Objectivity: Base financial statements on reliable and verifiable evidence. Use objective evidence, such as bank statements, invoices, receipts, and contracts, to support the information presented in the financial statements. Ensure that financial statements are free from bias and subjective judgment.
Prudence: Prepare financial statements in a cautious and prudent manner. Assume the worst-case scenario and avoid overstating the value of assets or the amount of profits.
Realization: Recognize revenue in the financial statements only when it has been earned and is no longer dependent on future events. Ensure that revenue is recognized only when the sale has been completed, the goods have been delivered, and the customer has paid, or when the amount of revenue that can be reliably estimated can be recognized.
Consistency: Ensure that financial statements are prepared in a consistent manner, following the same accounting principles and methods from one period to the next. This will help to ensure that financial statements provide an accurate and comparable representation of the business’s financial position and performance over time.
the usefulness of accounting conventions to a business and its stakeholders
Accounting conventions provide a framework for preparing financial statements in a consistent and credible manner. This helps to enhance the credibility of the financial statements, making them more trustworthy and reliable for stakeholders.
By providing an accurate and reliable representation of the financial performance of a business, accounting conventions help stakeholders, such as investors and creditors, to make informed decisions about the business.
Accounting conventions require financial statements to be prepared in a transparent manner, providing stakeholders with a clear understanding of the financial position and performance of the business.
The importance of accounting conventions to a business and its stakeholders
Improving the quality of financial statements: By following a set of accounting conventions, businesses can improve the quality of their financial statements, making them more reliable and trustworthy for stakeholders. This can help to increase the confidence of stakeholders in the financial performance of the business and improve decision-making.
