accounting concepts

Ground rules of accounting that are (or should be) followed in preparation of all accounts and financial statements. The four fundamental concepts are (1) Accruals concept: revenue and expenses are taken account of when they occur and not when the cash is received or paid out; (2) Consistency concept: once an entity has chosen an accounting method, it should continue to use the same method, except for a sound reason to do otherwise. Any change in the accounting method must be disclosed; (3) Going concern: it is assumed that the business entity for which accounts are being prepared is solvent and viable, and will continue to be in business in the foreseeable future; (4) Prudence concept: revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is a reasonable 'possibility' of incurring them. Also called conservation concept. Other concepts include (5) Accounting equation: total assets of an entity equal total liabilities plus owners' equity; (6) Accounting period: financial records pertaining only to a specific period are to be considered in preparing accounts for that period; (7) Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value; (8) Entity: accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees; (9) Full disclosure: financial statements and their notes (footnotes) should contain all pertinent data; (10) Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower) to reflect the effects of obsolescence; (11) Maintenance of capital: profit can be realized only after capital of the firm has been restored to its original level, or is maintained at a predetermined level; (12) Matching: transactions affecting both revenues and expenses should be recognized in the same accounting period; (13) Materiality: relatively minor events may be ignored, but the major ones should be fully disclosed; (14) Money measurement: accounting process records only those activities that can be expressed in monetary terms (with some exceptions, as in cost-accounting); (15) Monetary measurement: only the activities measurable in terms of money should be recorded; (16) Objectivity: financial statements should be based only on verifiable evidence, comprising an audit trail; (17) Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off (discharged); (18) Unit of measurement: financial data should be recorded with

a common unit of measure (dollar, pound sterling, yen, etc.). Also called accounting conventions, accounting postulates, or accounting principles. ground rules
ground water

Procedures and limits agreed-to by the parties to a negotiation to govern the process, conduct, and scope of the negotiations. cash flow statement

Summary of the actual or anticipated incomings and outgoings of cash in a firm over an accounting period (month, quarter, year). It answers the questions Where the money came (will come) from? and Where it went (will go)? cash flow statements assess the amount, timing, and predictability of cash-inflows and cash-outflows, and are used as the basis for budgeting and business-planning. The accounting data is presented usually in three main sections: (1) Operating-activities (sales of goods or services), (2) Investing-activities (sale or purchase of an asset, for example), and (3) Financingactivities (borrowings, or sale of common stock, for example). Together, these sections show the overall (net) change in the firm's cash-flow for the period the statement is prepared. Lenders and potential investors closely examine the cash flow resulting from the operating activities. This section represents after-tax net income plus depreciation and amortization and, therefore, the ability of the firm to service its debt and pay dividends. With balance sheet and income statement (profit and loss account), cash flow statement constitutes the critical set of financial information required to manage a business. Also called statement of cash flows.

accruals

Short-term liabilities (such as interest, taxes, utility charges, wages) which continually occur during an accounting period but are not supported by an invoice or a written demand for payment. When preparing financial statements for that accounting period, such liabilities are estimated on the basis of experience (based on previous payments). Similar increases in the assets of the firm (which may also continually occur) is not taken into account in order to comply with accrual basis accounting rules. consistency concept

Alternative term for consistency principle

consistency principle consistent Accounting: The idea in accounting that once an accounting method is adopted, it should be followed consistently from one accounting period to the next. If, for any reason, the accounting method is changed, a full disclosure of the change and an explanation of its effects on the items of the financial statements must be given. One of the duties of an auditor is to make sure the consistency principle is being followed because, without this, any change might make correct interpretation of the financial data impossible. Also called consistency concept. See also accounting concepts. accounting method accounting model Set of rules to determine when and how income and expenses are recorded. The two most common methods are accrual method and cash method. going concern Currently operating business that is expected to continue to function as such and remain viable in the foreseeable future. prudence concept An accounting principle that requires recording expenses and liabilities as soon as possible, but the revenues only when they are realized or assured. Also called conservatism principle. business entity business entity concept Organization established as a separate existence for the purposes of taxes. Corporations, limited liability companies, and sole proprietorships are types of common business entities. entity A person, partnership, organization, or business that has a legal and separately identifiable existence. accounting equation

Assets = liabilities + owners' equity. The most fundamental equation of doubleentry bookkeeping system, it expresses the relationship between what is owned and what is owed by an entity. accounting period Period for which a firm prepares its internal or external accounts; the period covered by the financial statements. For internal accounts, it may be a month or a quarter; for external accounts it is normally a period of 12 months. cost basis
1. Accounting: Original price of an asset or property, plus purchasing expenses, plus cost of permanent (long term) improvements, plus other costs (if any), less accumulated depreciation. 2. Tax assessment: Original or (in case of an inheritance) appraised value of an asset used in computing capital gains. full disclosure

1. Accounting: Principle under which all material facts (whose non-disclosure may render a financial statement misleading) must be disclosed. 2. Patenting: Basis under which a patent is granted. All material facts must be disclosed in the patent application, any deviation from this rule may render the patent null and void. lower of cost or market value Conservative valuation rule of accounting which requires certain types of assets (such as inventory) to be valued either at their historical cost or at the current replacement cost whichever is less. Also called lower of cost and net realizable value, its application is mandated under the provisions of GAAP. maintenance 1. Activities required or undertaken to conserve as nearly, and as long, as possible the original condition of an asset or resource while compensating for normal wear and tear. 2. Accounting: A periodic cost incurred in activities that preserve an asset's operational status without extending its life. Maintenance is an expense that, unlike capital improvement (which extends an asset's life), is not capitalized. 3. Engineering: Actions necessary for retaining or restoring a piece of equipment, machine, or system to the specified operable condition to achieve its maximum useful life. It includes corrective maintenance and preventive maintenance. 4. Law: (1) Meddling in litigation (without having a genuine stake) by taking sides, and/or giving financial or other assistance to one of the litigant parties. See also

champerty. (2) Financial support or supply of necessities given on court orders by one party to another such as upon a divorce or legal separation. materiality Measure of the estimated effect that the presence or absence of an item of information may have on the accuracy or validity of a statement. Materiality is judged in terms of its inherent nature, impact (influence) value, use value, and the circumstances (context) in which it occurs. Opposite of triviality. See also material fact. MATCHING CONCEPT MATCHING CONCEPT is the accounting principle that requires the recognition of all costs that are directly associated with the realization of the revenue reported within the income statement. Off-Setting One that reduces the gross amount of another account to derive a net balance. Accumulated depreciation, which is a contra account to fixed assets to obtain book value, is an example of an offset account. Discount on note payable, which is a reduction of notes payable to derive the carrying value, is another example. MONEY MEASUREMENT CONCEPT MONEY MEASUREMENT CONCEPT stipulates that all business transactions must be expressed in money terms, i.e., if something cannot be measured in money; it will not be included in accounting books. DualAspectconcept: This state that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspect are always equal to each other. In other words, this is the alternate form of the accounting equation: Assets=Liabilities+Capital Dual aspect concept is known as "Double Entry Book Keeping System".

a. Conceptual framework is a framwork for "PREPARATION AND PRESENTATION OF FINANCIAL STATEMENT". It covers scope, objectives, persons who use financial statements, underlying assumptions of financai statements, qualitative characteristics of financial statements, elements of financial statements, recgnition criteria, measurement criteria and concepts of capital and capital maintenance. its a foundation from which IFRSs are developed. a set of theoretical principles that underlies the practice and regulation of financial accounting. In the United States, this is expressed in the Statements of Financial Accounting Concepts issued by the Financial Accounting Standards Board. In the United Kingdom, it is expressed in the Statement of Principles issued by the Accounting Standards Board. A theoretical structure of assumptions, principles, and rules that holds together the ideas comprising a broad concept.

Regulatory frameword is IFRS I.E standards developed from framework relating to specific issues such as IAS 2 inventories, IAS 11 Construction contracts .. etc.