Accounting Concepts and Principles

Accounting concepts and principles

Accounting concepts are qualities that users expect to be present in financial reports. They form a conceptual framework defining the nature, subject, purpose and broad content of financial reporting.

General accounting concepts

Relevance

Accounting information must be based on information directly related to the business being reported on.

Reliability

The accounting reports should represent an effective and faithful representation of financial events relating to the business.

Materiality

This concept requires that all significant events be included in financial reports. An event is regarded as material if it is likely to effect financial decisions.

Comparability

If accounting reports are to be compared from one reporting period to the next then the methods of accounting used must be consistent from one period to the next.

Understandability

It is of no value to present accounting reports which users are simply unable to understand.

Constraint of timeliness

Lack of timeliness acts as a constraint to achieving the above qualities in reporting. Timeliness indicates that reports are only of value if available within a reasonable time

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Matching

Sets out the point of time at which revenue may be recognized.

Breach: A contract is signed for advertising in your magazine. Although you will not include any advertising in this period's work you still include the revenue paid in advance.

Disclosure

The owner is obligated to disclose any transactions of a significant financial nature in their reports.

Breach: The owner determines not to include the recent sale of property in the financial reports as this may deter potential buyers of the business.

Consistency

Accounting reports from one period to the next should be prepared on the same basis.

Breach: The owner uses one method of depreciation for a particular asset in one period and an alternative method in the second period.

Diversity

Allows for the fact that no...