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• Itstatesthatacompanywouldoperate(neverdieorst
op)foraforeseeablelongfuture.
• Inthisconcept,itisassumedthatthebusinesswill
continuetobeinoperationforanindefiniteperiodof
time.Ifthebusinessweregoingtobesold,thenitwoul
dbenecessarytoknowhowmuchtheassetswillfetch
.
Legal/Business entity concept
• Thesearethebeliefsofwhichpreparationandpresentati
onoffinancialstatementisbuiltupon.
• Inaccounting,therearetwoassumptions:
• Stability:abeliefthatthemonetaryunitswhichistheb
asisofvaluationandmeasurementofalltransactionrem
ainthesameoveraforeseeablefutureperiodoftme.
• continuity:Agoingconcernwhichsharethebeliefthat
thebusinessentitywillsurviveandcontinueoperationi
naforeseeablefuture
THE ACCOUNTING CONVENTIONS
• Theaccountingconventionscanbeinterpretedinmany
ways.Whatwerethereforegrownupinaccountingarege
nerallyacceptedapproachestotheapplicationofthecon
cepts.Theseapproachesareknownastheconventionsof
accounting(Regulation).Themainconventionsare:-
• -Materiality
• -Conservatism/prudence
• -Consistency
• -objectivity
MATERIALITYCONVENTION
• Itstatesthatafinancialstatementshouldpresentan
dreportallitemsoftransactionwhicharecapableofi
nfluencingthedecisionofstakeholdersndifsuchite
msomissioncompletelyorwronglystatedwouldsig
nificantlyalterthestakeholders’decision.
• Thisisaconventionthatrecordsanythingthataresig
nificantenoughtojustifytheusefulnessoftheinfor
mation.Onlyitemsthataredeemedsignificantforag
ivensizeofoperationshouldberecorded.Accounta
ntsareguidedtoignoreinsignificantdetailsotherwi
setheaccountwillbeburdeneddownwithminutede
tails.Thereforematerialityisanissuerofjudgment.
CONSERVATISM/PRUDENCE
CONVENTION
• Itstatesthatafinancialstatementsreportandrecog
nizeinstantlyandadequatelyknownlosesandgains
/profitisignoreduntilitsfullrealizationiscertain.
• Veryoftenanaccountanthastomakeachoiceasto
whichfigurehewilltakeforagivenitem.
• Conservatismmeansthattheaccountantwilltaketh
efigure,whichwillunderstateratherthanoverstatet
heprofit.Allanticipatedlossesshouldberecordedb
utallanticipatedgainsshouldbeignored.
• Thereforeprovisionsismadeforalllosseseventho
ughtheamountcannotbedeterminedwithcertainty
.
CONSISTENCY CONVENTION
• Itstatesthatthefinancialstatementsshouldbeprep
aredinawaythatasimilaritemsoftransactionsaretr
eatedequallyandsimilarlysoastomaintinuniform
presentationformatadoptableoveratime.
• Theconceptandconventionalreadylistedaresob
roadthatinfacttherearemanydifferentwaysinwhic
hitemsmayberecordedintheaccounts.
• Bythisassumption,accountantsareexpectedtorec
ordandreportaccountingactivitiesinthesamewayy
earbyyearifanysensibleandmeaningfulcompariso
nwouldbemadtofinancialreportofafirmfordiffere
ntperiods.Havingaparticularmethodwouldgiveth
efirmthemostequitablepictureoftheactivitiesofth
ebusiness.
OBJECTIVITY CONVENTION
• Itstatesthatpreparationandpresentationoffinanci
alstatementsshouldbemadefreefromtheaccounta
nts/preparersbias,undueinfluenceandconflictofi
nterest.
• Allitemsoftransactionsreportedaresupportedb
ythedocumentaryevidenceandfacts..
Factors to Consider when Choosing
Accounting policies
• Some concepts , methods and bases conflict with one
another. Thus, judgment is required to select the good
relevant policies for your financial statement so as to
ensure true and fair view of the reporting. These factors
are as follows:
• Fairness
• Materiality
• Substance over form
• Objectivity
• prudence
• By
Disclosure Requirement of
Accounting policies
• IFRS-IAS/SAS1states that all accounting policies
of a reported entity should be disclosed together
under one caption rather than as note the
individual items in the financial statement.
Changes in the Accounting Policies
• Consistencyisrequiredtobeappliedinfinancialrep
orting,yet,instancesmaywarrantchangesofaccoun
tingpolicies.
• Thecircumstancesgivingrisetochangesare:
• Wheretheexistingpoliciesnolongerensuretruea
ndfairviewoftheevent.
• Wherethereisanewaccountingstandardthatren
derstheexistingpoliciesinvalid.
• Wherethereinnewlegislation/regulationthatwo
uldensureabetterpresentationoftrueandfairviewo
ftheaccount
ACCOUNTING PRINCIPLES
• Accounting is guided by the following principles:
• Substance over form
• Objectivity
• Fairness
• Materiality
• Prudence
• Substance over form: states that substance/uses/economic
reality of an item of transaction is always reported at the
expense of legal form.
• Fairness: states that all stake holders of accounting are
treated with equally without favoring a group at the expense
of another.
• Assets and Liabilities are subject to or exposed
to these methods of valuation as proposed by
accounting policies.
• The methods include:
• Historical cost methods
• Realization value methods
• Current value methods
• Replacement cost methods
Impact of Accounting Policies on the
recognition/measurements of Assets
and Liability