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Accounting Framework
and Concepts
Overview
Learning Outcomes
ACCOUNTING CONCEPTS
The dual aspect concept states that there are two aspects of
accounting, one represented by the assets of the business and the
other, represented by the claims against the assets.
The concept stipulates that these two aspects are always equal to
each other.
CAPITAL
LIABILITIE
S
ASSET
S
The stable money concept assumes that the value of a dollar is stable
and remained unchanged over time. This means that we will
disregard the effect of inflation (or deflation) when we prepare the
accounts.
UNDERLYING ASSUMPTIONS
GOING CONCERN
The accrual basis holds that the revenue we earn and the expenses
we bear are recognized at the time they take place, and not at the
time they are actually paid for (which may be several months
later).
MATERIALITY
MATERIALITY CONT.
Example:
PRUDENCE
PRUDENCE CONT.
Examples:
By applying the prudence concept,
provision is made for all known expenses
and losses, even though the amount is just
an estimation and not certain So, if we
estimate that 10% of all outstanding debts
over and above what has already gone bad,
to be doubtful, then a allowance for
dopubtful debts of 10% must be created as
a matter of prudence. It does not mean
that 10% will go bad in the future.
Probably, everything will prove to be good.
But we must play safe i.e. be prudent.
CONSISTENCY
Example:
If the stock was bought on credit, from a
legal point of view the stock does not
belong to the business until the price
has been paid for. However, from an
economic point of view, the stock can be
used by the business for resale. Based
on the substance over form concept, the
business will show stock as if it is legally
owned by the business