Conceptual framework for financial reporting, statement of financial accounting concepts, Conceptual framework, elements of financial statements, recognition and measurements, qualitative characteristics of accounting information, GAAP, SEC, FASB, CPA exam, he Entity Concept, The Accounting Period Concept, The Cost Principle, The Matching Concept, The revenue Recognition Principle, The Conservatism Principle, The Going Concern Principle.
In the practice of financial accounting, certain basic assumptions are important to an understanding of the manner in which data are presented. The following four basic assumptions underlie the financial accounting structure:
Economic Entity Assumption. Economic activity can be identified with a particular unit of accountability in a manner that assumes the company is separate and distinct from its owners or other business units.
Going Concern Assumption. In the absence of contrary information, a company is assumed to have a long life. The current relevance of the historical cost principle is dependent on the going-concern assumption.
Monetary Unit Assumption. Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is assumed to remain relatively stable over the years in terms of purchasing power. In essence, this assumption disregards any inflation or deflation in the economy in which the company operates.
Periodicity Assumption. The economic activities of a company can be divided into artificial time periods for the purpose of providing the company’s periodic reports.
10. (L.O. 7) Certain basic principles are followed by accountants in recording and reporting the transactions of a business entity. These principles relate to how assets, liabilities, revenues, and expenses are to be identified, measured, and reported.
Measurement Principle. A ‘mixed-attribute’ system permits the use of various measurement bases.
Historical Cost Principle. Acquisition cost is considered a reliable basis upon which to account for assets and liabilities of a company. Historical cost has an advantage over other valuations, as it is thought to be verifiable.
Fair Value Principle. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in on orderly transaction between market participants at the measurement date. Recently, GAAP has increasingly called for the use of fair value measurements in the financial statements.
Revenue Recognition Principle. Revenue is recognized at the time in which the performance obligation is satisfied.
Expense Recognition Principle. Recognition of expenses is related to net changes in assets and earning revenues. The expense recognition principle is implemented in accordance with the definition of expense by matching efforts (expenses) with accom-plishment (revenues).
Product costs, such as material, labor, and overhead, attach to the product, and are recognized in the same period the products are sold.
Period costs, such as officers’ salaries and other administrative expenses, attach to the period, and are recognized in the period incurred.
Full Disclosure Principle. In the preparation of financial statements, the accountant should include sufficient information to influence the judgment and decision of an informed user. A series of judgmental tradeoffs must occur.
11. (L.O. 8) Although accounting theory is based upon certain assumptions and the application of basic principles, there are some exceptions to these assumptions. One exception is often called a constraint, and sometimes justifies departures from basic accounting theory.
Cost Constraint. The cost constraint (or cost-benefit relationship) relates to the notion that the benefits to be derived from providing certain accounting information should exceed the costs of providing that information. The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.