Accruals Vs Deferral in Financial Accounting - Key Differences | maijson GKB.

Starting a career in accounting may be exciting and intimidating at the same time. Do not be alarmed; this blog serves as your guide through the complex world of accounting ideas. 

We will give you a complete grasp of the fundamental ideas. The essential tenets and directives that support accounting practice are known as accounting concepts. These ideas offer a structure for keeping track of, evaluating, and interpreting financial transactions and support the maintenance of financial reporting's accuracy, uniformity, and comparability.

                                                            Image Credit: Pixabay

Key Accounting Concepts:

·        Entity Concept: 

•   According to this concept, the company is treated as separate entity from its owners.

·        Money Measurement Concept: 

•  According to this concept, only financial transactions are recorded, non-monetary transactions would be null and void.

·       Going Concern Concept: 

•  It means that the company will carry on their business in long term.

·         Historical Cost Concept: 

•  According to this concept, assets are recorded as cost price or originally purchased price.

 Accounting Assumptions:

•  These assumptions serve as the foundation for the preparation of financial statements.                   Implementation of accounting ideas and principles is based on these presumptions. Let's               examine the main presumptions of fundamental accounting:

·      Going Concern Assumption: 

• This assumption makes the unwavering assumption that a company will always operate. Put otherwise, it assumes that the business won't go through a liquidation very soon and accountants are able to create financial statements based on these assumptions.

·     Monetary Unit Assumption: 

• This assumption asserts that transactions and events should be recorded  in a common monetary unit, typically the currency of the reporting country. This assumption simplifies the complex barter system and facilitates the measurement and comparison of financial information.

·     Time Period Assumption: 

• This assumption assumes that the economic activities of a business can be divided into distinct and consecutive time periods. This division facilitates the preparation of periodic financial statements, such as monthly, quarterly, or annual reports, and help stakeholders to analyze the company's performance over specific intervals.

·    Accrual Basis Assumption: 

• This assumption requires that all transactions, regardless of when the   money is received or paid, be documented in the accounting period when its accrued.

Governing Principles: 

• These principles contribute to the transparency, consistency, and reliability of financial reporting. Here are key principles that govern financial reporting:

·   Generally Accepted Accounting Principles (GAAP): 

•  It represents a set of accounting standards, principles, and procedures that are widely accepted and universally recognized for financial reporting. GAAP ensures consistency and comparability in financial statements.

·      International Financial Reporting Standards (IFRS): 

• It is developed by the International Accounting Standards Board (IASB), aiming to create consistency in financial reporting across countries. IFRS facilitates international comparability of financial statements, making it easier for investors, analysts, and other stakeholders to assess and compare the financial performance of companies globally.

·     Principle of Fair Presentation: 

• Fair presentation ensures that financial statements provide a true and unbiased representation of  a company's financial health, promoting trust and confidence among stakeholders.

·       Principle of Substance Over Form: 

• This principle emphasizes the economic substance of transactions over their legal form. It requires reporting the economic reality of a transaction rather than just its legal structure.

·       Principle of Materiality: 

• Materiality guides accountants in determining what information to include in financial statements, ensuring that only relevant and significant details are presented.

·     Principle of Consistency: 

• Consistency ensures that the financial statements are comparable over the period, allowing stakeholders to analyze trends and changes in a company's financial performance.

·     Principle of Prudence: 

• The principle of prudence, or conservatism, encourages accountants to        recognize potential losses and liabilities as soon as they identified, while delaying the recognition of potential gains.

·     Enhanced Disclosures: 

• Beyond the basic financial statements, companies are encouraged to provide additional disclosures to enhance the clarity and completeness of financial information.

Valuation and Measurement Concepts: 

• It provide guidelines on how to determine the monetary values assigned to various elements in financial statements. These concepts ensure consistency. Let's explore key concept:

·       Historical Cost: 

• Historical cost is the original amount paid for an asset or received for a liability at the time of acquisition. It is the cost at which an asset is initially recorded in the books of accounts.

·       Fair Value: 

• Fair value is the estimated market value of an asset or liability at a specific point in time. It represents the price that would be received in case of sell an asset or paid if acquired.

·   Revenue Recognition and Matching Principles: 

• Revenue is recognized when it is realized, and expenses are matched to the revenue they help generate.

·      Lower of Cost or Market: 

• The lower of cost or market principle requires that inventory or assets be valued at the lower of their historical cost or their market value. If the market value of an asset goes down below its historical cost, it should be written down to the lower market value.

·    Conservatism: 

• It ensures a cautious approach in financial reporting, preventing the overstatement of financial results and assets. It aligns with the lower of cost or market principle.

·      Amortization and Depreciation: 

•  Amortization applies to the gradual reduction of the cost of intangible assets over its useful life, while depreciation applies to the gradual allocation of the cost of tangible assets over its useful life. These concepts reflect the wear and tear or diminishing value of assets over time.

·       Impairment: 

•  Impairment recognizes a decline in the value of assets such as goodwill, ensuring that the carrying amount reflects their recoverable amount.                                                                                                                                                                                                                                                                                                                                                                              Revaluation:  
• It involves adjusting the carrying amount of certain assets to their fair value. This is typically done for items like property, plant, and equipment. It provides a more accurate representation of the current market value of certain assets.

 

Conclusion: As we wrap up this comprehensive guide to accounting concepts, remember that these principles form the bedrock of financial understanding. Armed with this knowledge, you are better equipped to decipher financial statements, make informed decisions, and navigate the intricate world of accounting with confidence.

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