Accounting principles and rules Flashcards
Accrual accounting
Transactions are accounted for when they occur, which is not necessarily when the corresponding cash movement takes place (≠ cash accounting).
Time period or Separation of
accounting periods
The effect of the transaction is recorded and presented in the financial statements of the time period to which it relates. Accounting periods must be independent from one another.
Going concern assumption
Financial statements are normally prepared on the assumption that the reporting entity is a going concern, so will continue operating for the foreseeable future.
Business entity concept
The company is a separate entity from its owners; therefore the company’s activities
must be separated from the activities of its owners.
Monetary unit assumption
Inflation is not taken into account in the preparation of financial statements.
Predictive value (relevance)
Information is relevant if it can be used for predicting future outcomes such as the
nature, amount, and timing of future cash flows.
Confirmatory value (relevance)
Information is relevant when it can confirm or correct past evaluations.
Materiality (relevance)
Information is material if its omission or misstatement could influence the economic decisions of users.
Substance over form
(faithful representation)
The information must represent the economic reality of the transactions and events, which may differ from their legal form.
Completeness
(faithful representation)
A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations
Neutrality
(faithful representation)
A neutral depiction is one that is objective and made without bias. Where there is
uncertainty, prudence is applied so that assets and net income are not overstated, and liabilities and expenses are not understated.
Freedom from error
(faithful representation)
There are no errors or omissions in the financial information produced, although
inaccuracies can ultimately arise, particularly when making estimates.
Comparability
Users should be able to compare the financial statements of an entity over time and to other entities. Therefore, accounting methods should be consistent from one period to
another.
Verifiability
Knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation.
Timeliness
Information should be available to decision makers in time to be capable of influencing their decisions.
Understandability
Information should be understandable by users (assumed to have a reasonable knowledge of business and economic activities).
Cost constraint
The costs imposed by reporting information should be justified by the benefits of reporting that information.
Historical cost
The amount of cash paid to acquire an asset at the time of its acquisition.
Fair value
The amount at which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction.
Asset
Provides future economic benefits that will flow to the entity; Has a cost or value that can be measured reliably.
Liability
It is a present obligation of the entity to transfer an economic resource as a result of past events;
The amount at which the settlement will take place can be measured reliably.
Timing of revenue recognition
Related to income from sales of products or services and other revenues;
Related principles= accrual accounting concept, separation of accounting periods
Matching principle
The matching principle can be used to justify recognition. All expenses that were incurred to generate the revenues of a given period are recorded in that same period; and only the expenses that were incurred to generate the revenues of a given period are recorded in that same period.
