Accounting Standards Overview

Study Notes

Conceptual Framework in Accounting

Double-Entry System: Every transaction impacts two accounts, recording debits and credits to maintain balance.
Going Concern Assumption: Presumes that businesses will continue their operations indefinitely.
Separate Entity Principle: Distinguishes personal transactions of owners from those of the business.
Stable Monetary Unit: Financial events are measured in consistent currency; assumes stability in purchasing power despite economic fluctuations.
Time Period Concept: Reporting period typically lasts 12 months, which can be either:
- Calendar Year: January 1 to December 31.
- Fiscal Year: Any other consecutive 12-month period, starting on a different date.
Materiality Concept: Materiality is determined by the significance of an item's size and nature in financial statements.
Cost-Benefit Principle: Evaluates whether the costs of providing information justify the benefits derived from it.
Accrual Basis: Recognizes transactions at the time they occur, not when cash changes hands.
Historical Cost Principle: Assets are recorded based on their original purchase price.
Concept of Articulation: All elements of financial statements are interconnected, reinforcing the holistic view of financial health.
Full Disclosure Principle: Requires transparency by providing all necessary details for understanding financial statements.
Consistency Concept: Same accounting principles should be applied across reporting periods for comparability.
Matching Principle: Expenses are recognized in the same reporting period as the associated revenues they help generate.
Entity Theory: Determines income based on the equation: Assets = Liabilities + Capital; reflects income statement dynamics.
Propriety Theory: Focuses on valuing assets accurately; Assets - Liabilities = Capital; pertains to balance sheet assessments.
Residual Equity Theory: Important when dealing with different classes of shares; calculates equity for ordinary shareholders after preferred shareholder claims.
Fund Theory: Examines the management of funds as cash inflows minus cash outflows.
Realization Principle: The process of converting non-cash assets into cash or cash equivalents.
Prudence (Conservatism): Encourages caution in estimations to avoid overstating assets or understating liabilities; requires careful reporting.

Expense Recognition Principles

Matching Concept: Recognizes costs as expenses within the same period they correlate with reported revenues.
Systematic and Rational Allocation: Non-directly related costs are first recorded as assets and then expensed based on systematic consumption (e.g., depreciation).
Immediate Recognition: Costs failing to meet asset criteria are expensed immediately, such as losses due to impairment.

Common Branches of Accounting

Financial Accounting: Focuses on creating general-purpose financial statements for external stakeholders.
- Financial Statement: Shows an entity’s financial position and operational results.
- Financial Report: Combines financial statements with additional information to aid economic decisions.
- Objectives: Inform about economic resources, claims, and management stewardship.
Management Accounting: Provides internal decision-making support through performance analysis.
Cost Accounting: Involves measuring and analyzing costs related to production processes.
Auditing: Ensures fairness and reliability of financial statements by evaluating them against established criteria.
Tax Accounting: Prepares tax returns and offers advice regarding tax policies and compliance.
Government Accounting: Manages public funds and maintains the accountability of public entities.
Fiduciary Accounting: Oversees accounts managed on behalf of others to ensure their benefit.
Estate Accounting: Focuses on financial management for deceased individuals’ estates.
Social Accounting: Assesses and communicates the socioeconomic impact of business activities.
Institutional Accounting: Tailored for non-profit entities or organizations.

Description

This quiz covers key accounting concepts including the double-entry system, going concern assumption, and the stable monetary unit. Test your knowledge on these fundamental frameworks that support financial reporting and accountability. Perfect for students studying accounting principles.