1.0 INTRODUCTION
This is the third note among the notes that make up the course
— Introduction to Accounting. Any activity that you perform is facilitated if
you have a set of rules to guide your efforts. Further, you find that these
rules are of more value to you if they are standardised. When you are driving
your vehicle, you keep to the right.
You are in act following a standard traffic rule. A similar
principle applies to accounting. You should note that accounting is govern by a
number of generally accepted concepts and conventions. If you are to understand
and use accounting reports, you must be familiar with the rules and conventions
behind these reports.
2.0 OBJECTIVES
At the end of this note, you should be able to:
• understand the Generally Accepted Accounting Principles
(GAAP)
• understand the importance and necessity for uniformity in
accounting practices.
3.0 MAIN CONTENT
3.1 Accounting Principles
In note 2, accounting is referred teas the language of
business. To make the language convey the same meaning to all people, Accounts
have agreed on a number of concepts and conventions.
3.2 Accounting Concepts
Below are the number of accounting concepts which the
accountants try to follow:
3.2.1 Business Entity Concept
In accounting we make a distinction between businesses and the
owner or owners. Every business note is treated as an entity completely
different from the owner. All the records are kept from the viewpoint of the
business rather than from that of the owner or owners.
A business is an economic note separate and apart from the
owner or owners. As such, transactions of the business and those of the owners
should be accounted for and reported separately. In recording a transaction the
important question is how does it affect the business? For example, if the
owners of a shop were to take cash from the cash box for their personal use,
the accounts would show that cash had been, reduced. even though it does not
make any difference to the owners.
3.2.2 Going Concern Concept
Accounting assumes that the business will continue to operate
for a long time in the future to the contrary. The enterprise is viewed as a
going concern, that is, a continuing in operation, at least in the foreseeable
future. The owners have no intention to wind up or liquidate its operations.
The assumption that the business is not expected to be
liquidated in the foreseeable future, in fact, establishes the basis for many
of the Valuations and allocations in accounting.
For example, depreciation procedures rest upon this concept it
is the assumption which underlies the decisions of investors to commit capital
to business.
3.2.3 The Double-Entry
Concept
Every transaction involves two entries and these are both recorded
in the books of account. For every debit entry, there is a corresponding-credit
entry. You will understand this principle better in the next note. This will
enable, you to, understand, the double aspect and effects of a business
transaction.
3.2.4 Accrual Concept
The accrual concept makes a distinction between the receipt of
cash and the right to receive it, and the payment of cash and the legal
obligation to pay it. In actual business operations, the obligation to pay and
the actual movement of cash may not coincide.
This concept holds that profit is made or determined by
including revenue and costs and they, are earned or, incurred and not as cash
is received or paid. It is not necessarily correct that cash paid and received.
During a particular period of time represents the time income and essentially
that all transactions are accounted for e.g Electricity enjoyed but not yet
paid for.
3.2.5 Cost Concept
The resources (land, buildings, machinery, furniture etc.)
that a business owns are called assets. The money values that are assigned to
assets are derived from the cost concept. This concept states that an asset is
worth the price paid for or cost incurred to acquire it.
Thus, assets are recorded at their original purchase price and
this cost is the basis for all subsequent accounting for the assets. The assets
shown on the financial .statements do, not necessarily -indicate their present
market worth or market values. The cost concept does not mean that all assets
remain on the accounting records at their original cost for all time. The cost
of an asset that has a long but limited life is systematically reduced during
its life by a process called depreciation which will be discussed at some
length in a subsequent note.
3.3 Accounting Conventions
3.3.1 Convention of Conservatism
This convention, also known as the convention of Prudence is
often stated as anticipate no profit, provided for all possible losses.
This means that an accountant should follow a cautious
approach. This is a convention of caution or playing safe and is adhered to
while preparing the financial statements. For example, closing stock is valued
at cost or market price whichever is lower.
3.3.2 Convention of Full Disclosure
Note that apart from legal requirements, full disclosure of
all significant information should be made in the financial statements. For
example, the basis of valuation of fixed assets, investments and stock should
be clearly stated in the Balance sheet. In other words, accounting statements
should be honestly prepared.
3.3.3 Convention of Materiality
Whether something should be disclosed or not in the financial
statements will depend on whether it is materials or not materiality depends on
the amount involved in the transaction for example minor expenditure of N50 for
the purchase of waste basket may be treated as an expenditure of the period
rather than as an asset.
4.0 CONCLUSION
Accounting Principles are manmade. They are accepted because
they are believed to be useful in preparing the accounts of any business
enterprise.
The Principle enjoys a wide measure of support of the
accounting profession. That is why they are known as Generally Accepted
Accounting Principles (GAAP).
5.0 SUMMARY
In this note, you have now learnt the Principles of Accounting
which can assist you in preparing the accounts of any business enterprise. The
Principles of Accounting Concept and Conventions are both guidelines for
general applications they permit a wide variety of methods and practices. The
generally accepted accounting principles prescribe a uniform accounting
practice.
0 comments:
Post a Comment