Presentation Topic

Presented To

Md. Zamanur Rahman

Asst. ProfessorDepartment of BBA

Northern University Bangladesh

Accounting Principles

Group: A

Fakrul Abdein 110170200

Jakir Khan 110170201

Shahriar Khan Lodhi 110170202

Sheikh Amranul Islam Ridoy 110170203

Department of BBA

Northern University Bangladesh

Presented By

Accounting Principles

As indicated in the Feature Story, it is important that companies have general guidelines available to resolve accounting issues. Without these basic guidelines, each company would have to develop its own set of accounting practices. If this happened, we would have to become familiar with every company’s peculiar accounting and reporting rules in order to understand its financial statements. It would be almost impossible to compare the financial statements of different companies. This chapter explores the basic accounting principles that are followed in developing specific accounting guidelines. The content and organization of Accounting Principles are as follows.

Accounting Principles

Assumptions

• Monetary unit

• Economic entity

• Time period

• Going concern

Principles

• Revenue recognition

• Matching

• Full disclosure

• Cost

Constraints inAccounting

• Materiality

• Conservatism

Assumptions

Monetary Unit Assumption

The monetary unit assumption states that only transaction data that can be expressed in terms of money be included in the accounting records.

Example A company does not report the value of the company president in its financial records because that value cannot be expressed easily in dollars. An important corollary to the monetary unit assumption is the assumption that the unit of measure remains relatively constant over time. We will discuss this point in more detail later in this chapter. E T H I C S N O T EIn an action that sent shock

The economic entity assumption states that the activities of the entity be kept separate and distinct from the activities of the owner and of all other economic entities.

Example

It is assumed that the activities of IBM can be distinguished from those of other computer companies such as Apple, Dell, and Hewlett-Packard. Alcatel-Alsthom was taken intocustody for an apparent violation of the economic entity assumption. Allegedly, the executive improperlyused company funds to install an expensive security

Economic Entity Assumption

Time Period Assumption

The time period assumption states that the economic life of a business can be divided into artificial time periods. Thus, it is assumed that companies such as General Electric, Time Warner, and ExxonMobil, can subdivide their business activities into months, quarters, or a year for meaningful financial reporting purposes.

Going Concern Assumption

Financial statements are prepared assuming that the company is a going concern which means that the company intends to continue its business and is able to do so.The status of going concern is important because if the company is a going concern it has to follow the generally accepted accounting standards.The auditors of the company determine whether the company is a going concern of not at the date of financial statements.

Examples• An oil and gas firm operating in Nigeria is stopped by the Nigerian court from carrying out operations in Nigeria that firm is not a going concern in Nigeria, because it has to shut down.• A bank is in serious financial troubles and the government is not willing to bail it out. The Board of Directors has passed a resolution to liquidate the business. The bank is not a going concern.• A merchandising company has a current ratio below 0.5. A creditor $1,000,000 demanded payment which the company could not make. The creditor requested the court to liquidate the business and recover his debts and the court grants the order. The company is no longer a going concern.• A nationalized refinery is in cash flows problems but the government of the country provided a guarantee to the refinery to help it out with all payments, the refinery is a going concern despite poor financial position.

PRINCIPLES

Revenue Recognition Principle

Revenue recognition principle tells that revenue is to be recognized only when the rewards and benefits associated with the items sold or service provided is transferred, where the amount can be estimated reliability and when the amount is recoverable.Accrual basis of accounting is used in recognizing revenue which tells that revenue is to be recognized ignoring when the cash inflows occur.

Examples1.A telecommunication company sells talk time through scratch cards. No revenue is recognized when the scratch card is sold, but it is recognized when the subscriber makes a call and consumes the talk time.2.A monthly magazine receives 1,000 subscriptions of $240 to be paid at the beginning of the year. Each month it recognizes revenue worth $20,000 [$240/12*1,000].3.A media company recognizes revenue when the ads are aired even if the payment is not received or where payment is received in advance.

Matching Principle

In order to reach accurate net income figure the expenses incurred in earnings revenues recognized in a time period should be recognized in that time period and not in the next or previous. This is called matching principle.

Examples1.$2,000,000 worth of sales are made in 2010. Total purchases of inventory were $1,000,000 of which $100,000 remained on hand at the end of 2010. The cost of earnings is $2,000,000 revenue is $900,000 [$1,000,000 minus $100,000] and this should be recognized in 2010 thereby yielding a gross profit of $1,100,000.2.A hospital pays $20,000 per month to 5 of its doctors. Monthly sales are $500,000. $100,000 worth of monthly salaries should be matched with $500,000 of revenue generated.

Full Disclosure Principle

Full disclosure principle is relevant to materiality concept. It requires that all material information has to be disclosed in the financial statements either on the face or in the notes to the accounts.

Examples1.Accounting policies need to be disclosed because they help understand the basis of accounting.2.Details of contingent liabilities, contingent assets, legal proceedings, etc. are also relevant to the decision making of users and hence need to be disclosed.3.Significant events occurring after the date of the financial statements but before the issue of financial statements (i.e. events after the balance sheet date) need to be disclosed.4.Details of property, plant and equipment cannot be presented on the face of balance sheet, but a detailed schedule outlining movement in cost and accumulated depreciation should be presented in the notes.5.Tax rate is expected to change in near future. This information needs to be disclosed.

COST PRINCIPLE

COST PRINCIPLE is the principle where a company is obliged to record its fixed assets at their actual purchase price or production cost.

CONSTRAINTS

Materiality Concept Financial statements are prepared to help the users with their decisions. Hence, all such information which has the ability to affect the decisions of the users of financial statements is material and this property of information is called materiality.In deciding whether a piece of information is material or not requires considerable judgment. Information is material either due to the amount involved or due to the importance of the event.Examples1.The government of the country in which the company operates in working on a new legislation which would seriously impair the company's operations in future. Although there are no figures involved but the impact is so large that disclosure is imminent.2.The remuneration paid to the executives and the directors is material.3.The accounting policies are material because they help the users understand the figures.

Conservatism

A branch of accounting that requires a high degree of verification before making a legal claim to any profit. Accounting conservatism will recognize all probable losses as they are discovered and most expenditures as they are incurred. Revenue will be deferred until it is verified. Having strict revenue-recognition criteria is one of the most common forms of accounting conservatism.