UNIT 2: ACCOUNTING CONCEPTS AND PRINCIPLES

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Fundamental qualitative characteristics

Fundamental qualitative characteristics

Qualities that make accounting information useful for decision making by users.

Relevance

Financial information that can influence decisions made by users.

Predictive value

The ability of financial information to help users predict future outcomes.

Confirmatory value

Financial information that provides feedback on previous evaluations.

Materiality

The significance of information that could influence decisions if omitted or misstated.

Faithful representation

Financial reports that accurately depict economic phenomena.

Completeness

Inclusion of all necessary information for understanding the depicted phenomenon.

Neutrality

Financial information presented without bias.

Free from error

No errors or omissions in the reported information.

Enhancing qualitative characteristics

Attributes that improve the fundamental qualitative characteristics of financial information.

Comparability

The ability to identify similarities and differences among items.

Consistency

Use of the same methods for the same items over time or across entities.

Uniformity

Avoiding misleading comparisons by ensuring like items are treated similarly.

Verifiability

Assurance that independent observers can agree on the faithful representation of information.

Timeliness

Availability of information to influence decisions in a timely manner.

Understandability

Clarity and conciseness in presenting financial information.

Entity assumption

The business unit is separate from its owners for accounting purposes.

Going concern assumption

The business entity is expected to continue operating indefinitely.

Monetary measurement

Only transactions expressible in monetary terms are recorded.

Time period assumption

Business life is divided into short periods for timely financial reporting.

Accrual basis

Revenue and expenses are recognized when earned or incurred, not when cash is exchanged.

Cost principle

Transactions recorded at their original cost to support objectivity.

Revenue recognition principle

Revenue is recorded when earned, regardless of cash receipt timing.

Matching principle

Revenues and expenses are matched in the same accounting period.

Full disclosure principle

Providing all necessary information for users to interpret financial statements.

Modifying constraints

Limitations that affect accounting choices in financial reporting.

Cost-benefit test

Weighing the cost of information gathering against the benefits received.

Conservatism

Choosing the more cautious approach in uncertain situations.

Industry practice

Special accounting principles developed for specific industries.

Objectivity

Using documents as the basis for recording transactions to avoid subjectivity.

Substance over form

Treating transactions based on their real substance rather than legal form.