Presentation of Accounting

8/3/2019 Presentation of Accounting

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M.Farhan 118

Arslan Rasheed 104

Habib Rizvi 133

M. Qasim 121Mukhtar Ahmad 138


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1-Conventions,2-Accounting standards,

3-Framework.


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Accounting Convention

An accounting convention refers to commonpractices which are universally followed inrecording and presenting accounting data


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More About Accountingconventions

Accounting conventions are evolved throughthe regular and consistent practice over the

years to facilitate uniform recording in the

books of accounts.


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The most important conventions which havebeen used for a long

period are :

1= Convention of consistency.2= Convention of full disclosure.

3= Convention of materiality.

4= Convention of conservatism.


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Convention of consistency

The convention of consistency means thatsame accounting principles should be usedfor preparing financial statement in specificperiod.


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It is to be found within the group of inter-related financial statements of an organizationon the same date. It occurs when fixed assetshave been shown at cost price and in theinterrelated income statement depreciation has

also been charged on the historical cost of theassets.


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This consistency is to be found between

financial statements of one entity from periodto period. Thus, it helps in comparingperformance of the business between two

years i.e. current year with past year.


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This consistency is to be found in thestatements of two different business entities of

the same period. This type of consistencyassists in making comparison of the

performance of one business entity with theother business entity in the same trade and onthe same date.


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Convention of full disclosure requires that allmaterial and relevant facts concerningfinancial statements should be fully disclosed.Full disclosure means that there should be full,fair and adequate disclosure of accountinginformation. Adequate means sufficient set of

information to be disclosed. Fair indicates anequitable treatment of users. Full refers tocomplete and detailed presentation of

information.


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The convention of materiality states that, tomake financial statements meaningful, only

material fact i.e. important and relevantinformation should be supplied to the users ofaccounting information.


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This convention is based on the principle thatAnticipate no profit, but provide for allpossible losses. It provides guidance forrecording transactions in the books of accounts. It is based on the policy of playingsafe in regard to showing profit. The main

objective of this convention is to showminimum profit.


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Frame

Work


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An accounting conceptual framework canbe defined as: a coherent system of inter-

related objectives and fundamentals thatshould lead to consistent standards that

prescribe the nature, function and limitsof financial accounting and financialstatements.


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The Need for a Conceptual Framework

To develop a coherent set of standards

and rulesTo solve new and emerging practical

problems

Conceptual Framework


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The Framework is comprised of three

levels:First Level = Basic Objectives

Second Level = Qualitative

Characteristics and Basic Elements

Third Level=

Recognition andMeasurement Concepts.

Conceptual Framework


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Financial reporting should provide information that:

(a) is useful to present and potential investors and creditors(a) is useful to present and potential investors and creditorsand other users in making rational investment, credit, andand other users in making rational investment, credit, andsimilar decisions.similar decisions.

(b) helps present and potential investors and creditors and(b) helps present and potential investors and creditors andother users in assessing the amounts, timing, andother users in assessing the amounts, timing, anduncertainty of prospective cash receipts.uncertainty of prospective cash receipts.

(c) portrays the economic resources of an enterprise, the(c) portrays the economic resources of an enterprise, theclaims to those resources, and the effects ofclaims to those resources, and the effects oftransactions, events, and circumstances that change itstransactions, events, and circumstances that change itsresources and claims to those resources.resources and claims to those resources.

First Level: Basic Objectives


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Qualitative Characteristics

The FASB identified the Qualitative

Characteristics of accounting information that

distinguish better (more useful) information

from inferior (less useful) information for

decision-making purposes.

Second Level: Fundamental Concepts


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Understandability

A company may present highly relevant and

reliable information, however it was useless to

those who do not understand it.

Second Level: Fundamental Concepts


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Second Level: Qualitative Characteristics

Secondary Qualities:Comparability Information that is measured

and reported in a similar manner for

different companies is consideredcomparable.

Consistency - When a company applies the

same accounting treatment to similar eventsfrom period to period.


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Economic Entity company keeps its activityseparate from its owners and otherbusinesses.

Going Concern - company to last long enough tofulfill objectives and commitments.

Monetary Unit - money is the commondenominator.

Periodicity - company can divide its economicactivities into time periods.

Third Level: Assumptions


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Materiality - an item is material if its inclusion oromission would influence or change the judgment ofa reasonable person.

Industry Practice - the peculiar nature of someindustries and business concerns sometimes requiresdeparture from basic accounting theory.

Third Level: Constraints


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The term standard denotes a discipline,

which provides both guidelines andyardsticks for evaluation. As guidelines,accounting standard provides uniformpractices and common techniques ofaccounting. As a general rule, accountingstandards are applicable to all corporateenterprises.


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AS-1 Disclosure of accounting policies (January

1979). This standard deals with the disclosure ofsignificant accounting policies in the financialstatements.

AS-2Valuation of Inventories (June 1981). Thisstandard deals with the principles of valuinginventories for the financial statements.

AS-3 (Revised) Cash flow statement (June 1981,

Revised in March 1997). This standard deals with thefinancial statement which summaries for a givenperiod the sources and applications of an enterprise.


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AS-4 Contingencies and events occurring after theBalance Sheet date (November 1982, Revised in April,1995) This standard deals with the treatment ofcontingencies and events occurring after the balancesheet date.

AS-5 Net profit or loss for the period, prior period(period before the date of balance sheet) items andchanges in accounting policies (November 1982,

Revised in February 1997). This standard deals withthe treatment in financial statement of prior periodand extraordinary items and changes in accountingpolicies.


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AS-6 Depreciation Accounting (November

1982). This standard applies to alldepreciable assets. But this standard does notapply to assets in the category of forests,

plantations and similar natural resources andwasting assets.

AS-7Accounting for constructioncontracts (December 1983, revised inApril2003). This standard deals with accounting forconstruction contracts in the financialstatements of contractors.


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AS-8Accounting for Research andDevelopment (January 1985). This standarddeals with the treatment of costs of research and

development in financial statements.

AS-9 Revenue Recognition (November 1985).This standard deals with the bases forrecognition of revenue in the statement of profit

and loss of an enterprise.


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AS-10Accounting for fixed assets(November 1991). This standard deals

with recognition of fixed assets grouped intovarious categories, such as land, building,

plant and machinery, vehicles, furniture andgifts, goodwill, patents, trading and designs.


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Presentation of Accounting

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