WEEK 3a: CONCEPTS, CONVENTIONS, DEFINITIONS

Concepts and Conventions

Accepted ways of doing things that have gained general acceptance in the accounting profession over time.

Fundamental Principles

Four key concepts in accounting that are given extra weight by regulation: accruals concept, consistency concept, going concern concept, and prudence convention.

Accruals (matching) concept

Accounting records events and transactions over continuous periods; income or expenditure should be charged to the period to which it relates.

Cash basis vs. Accruals basis

Under cash basis, expenses are recorded when paid; under accruals, expenses are recorded when incurred, smoothing costs over periods.

Consistency Concept

Accounting policies must be adhered to year-on-year and must not be changed without good reason.

Going Concern Concept

The assumption that a business will continue to operate, allowing historic cost values to be used in financial statements.

Prudence Convention

The inclusion of caution in judgments made in accounting to avoid overstating income and assets or understating liabilities and expenses.

Qualitative Characteristics of Financial Statements

Desirable elements that good financial reporting information should possess: understandability, relevance, reliability, and comparability.

Understandability

Financial information should be comprehensible to users with reasonable knowledge of business and accounting.

Relevance

Financial information influences the economic decisions of users by helping them evaluate events.

Materiality

A sub-attribute of relevance; information is material if its omission or misstatement could influence economic decisions.

Reliability

Financial information must be free from material error and bias, faithfully representing what it purports to represent.

Comparability

The ability to compare financial information across different periods or entities, requiring disclosure of accounting policies.

Asset Definition

A resource controlled by an enterprise resulting from past events, expected to provide future economic benefits.

Liability Definition

A present obligation of an enterprise arising from past events, expected to lead to an outflow of resources embodying economic benefits.

Provisions Definition

A subset of liabilities that are uncertain in timing or amount, as defined by IAS37.

Big Bath Provision

An accounting practice manipulating earnings by recognizing a large provision in one year and releasing it the next.

Intangible Assets

Non-monetary assets without physical substance, such as goodwill or intellectual property, defined by IAS38.

Recognition Criteria for Assets

For an asset to be recognized, it must be identifiable, controlled, and the cost must be measurable reliably.

Research and Development Costs

Costs associated with research typically not recognized as assets, while development costs can be if specific criteria are met.