Principles of Accounting1. The context and purpose of financial Accounting. * The scope and purpose of financial statements for external reporting - Users’ and stakeholders’ needs, * The main elements of financial reports * The qualitative characteristics of financial information. * Accounting conceptsWHAT IS ACCOUNTING? Accounting is the process of identifying, measuring, recording, summarizing economic information and finally communicating it to interested parties (users) 1.2 ANALYSIS OF DEFINITION (a) Process mean accounting has steps and procedures of doing things. (b) Identifying means accounting is only concerned with activities or transactions relating to the business. (c) Measuring means that all activities related to the business should be stated in monetary terms.(e) Summarizing means analyzing all recorded information in categories and preparing financial statements. Financial statements include: (i) Income statement, which is a summary of trading activities to establish profit or loss achieved during a trading period. (ii) Balance sheet which is a summary of what the business owns or owes at a given time. (f) Financial statements should be provided to any body interested for assessment and decision making (communication).USERS OF ACCOUNTING INFORMATION When financial statements are prepared they are passed on to interested parties who might need them for various reasons. The following might be interested in financial information. (a) Managers of the organization: Managers are people appointed by owners of the company to supervise the daily activities of the company. Managers need accounting information to make planning decisions. (b) Shareholders and potential investors: A shareholder is a member of limited company and therefore holds one or more shares in that company. Potential investors are people with resources but are yet to make a decision as to where to invest. Shareholders are interested in profits and security of their investment. They need to look at accounting information to access profitability of the company and will make decisions such as retaining their investment in the company or invest it somewhere else.(c) Trade contacts: Trade contacts are suppliers of goods and services to the company. They also includecustomers. Credit suppliers are interested in the ability of the company to pay its debts should they supply to it. Customers are interested in continuous supply with no danger of the business closing. Financial accounting information may just satisfy their concerns. (d) Lenders Lenders provide finance to companies in form of loans which could be short or long term Their main concern is to whether a company will be able to pay interest on loans and also eventually repay the loan itself. This information may be provided by accounting information. (e) Government agencies Government needs to know how the economy is performing in order to plan for financial and industrial policies. Tax authorities would also want to know the business profits in order to assess the tax payable by the company. Financial statements could be used as a basis.f) Employees and trade union representatives Employees are workers in a company. Their concern is job security and better conditions of services. They will need accounting information as a basis for negotiating for improved salaries and conditions of services. Accounting information may also disclose that the company is threatened with closure and employees will have to make a decision of staying or not. (g) The public: People in general want accounting information because enterprises affect them in many ways. Companies are found where people live. Companies provide jobs for the people and they also use local suppliers. Companies may also affect the environment through pollution. (h) Financial analyst and advisers: These are specialists in economic trends. They need accounting information in order to advise their clients on best investment options and generally to inform the public on financial matters.QUANTITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION For information to be of good quality, it must be able to satisfy the needs and requirements of those looking at it and it make financial information useful to users. (a) Relevance Accounting information is relevant if it is connected with what the user wants. That is, it must influence them to make a decision. (b) Reliability Accounting information provided should be depended upon when making decisions. For accounting information to be reliable it must be audited (Examined) by qualified and experienced auditors so that accounts are free from error.c) Comparability An exercise undertaken to judge to what extent accounting information is similar or not similar. For reasonable conclusion to be made about the business it is important that its accounting information is comparable. N.B. When comparing use similar businesses both in size and nature, or use accounting information from the same business from previous year. If business is starting for the first time a budget could also be used. (d) Understandability For anybody to make a meaningful decision they should have clear knowledge of what they are looking at. Any difficulties arising from its interpretation must be dealt with by those who understand it.(e) Completeness When financial statements are prepared they should have all its parts and should portray a whole or rounded picture of the business activities. (f) Objectivity Financial statements should be free from opinions. They should not be prepared in order to satisfy a particular group. They should be actual facts otherwise they would be considered biased. The problem of bias is dealt with by external audit. (g) Timeliness For information to be meaningful, it should be provided at the time it is required so that timely decisions could be made. Accounts are usually published soon after the year endUnderlying accounting concepts Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts.. Objectives of Accounting Concepts + The main objective is to achieve uniformity and consistency in preparing and maintaining financial statements. + Itacts as the underlying principle that assists accountants in preparing and maintaining business records. + It aims to achieve a common understanding of rules or assumptions to be followed by all types of entities, thereby facilitating comprehensive and comparable financial information.Importance of Accounting Concept * The importance of the accounting concept is visible in the fact that its application is involved in every step of recording a financial transaction of the entity. + Following the generally accepted accounting concepts helps save the accountants’ time, effort, and energy, as the framework is already set. + It improves the quality of financial statements and reports concerning the understandability, reliability, relevance, and comparability of such financial statements and reportsAccounting Concept WT Materiality WCE ug ec lla as eu) Accrual DEE asia WE aly LCE PE) eT Tae)(i) The historical cost concept The cost concept states that any asset that the entity records shall be recorded at historical cost value, i.e., the asset's acquisition cost .It means that assets are normally shown at cost price, and that this is the basis for valuation of assets. (b) | The money measurement concept Money Measurement Concept is one of the accounting concepts according to which a company should record only those events or transactions in its financial statement which can be measured in terms of money and where assigning the monetary value to the transactions is not possible. It will not be recorded in the financial statement. It means that only those transactions and events measured in monetary terms are recorded in the books,. In other words, all those events and transactions that could not be quantified in monetary terms are not recorded in the financial statements of the company (iii) Realization Concept This concept is related to the cost concept. The realization concept states that the entity should record an asset at cost until and unless the realizable value of the asset has been realized. Practically, it will be correct to say that the entity will record the realized value of the asset once the asset has been sold or disposed of off, as the case may be(iv) The business entity concept The business entity concept implies that the affairs of a business are to be treated as being quite separate from the non-business activities of its owner(s).The items recorded in the books of the business are, therefore, restricted to the transactions of the business. No matter what activities the proprietor(s) get up to outside the business, they are completely disregarded in the books kept by the business. The only time that the personal resources of the proprietor(s) affect the accounting records of a business is when they introduce new capital into the business, or take drawings out of it. (v) The dual aspect concept This concept is the backbone of the double-entry bookkeeping system. It states that every transaction has two aspects, debit and credit. The entity has to record every transaction and give effect to both debit and credit elements.. (vi) Accrual Concept According to Accrual concept the transactions are to be recorded as and when they occur, not as and when the cash is received or paid, and for the period the transaction pertains.(vii) Going concern This concept assumes that the business will be carried out on an ongoing basis. Thus, the books of accounts for the entity are prepared such that the business will be carried on for years to come. Under UK accounting standards, the going concern concept implies that the business will continue to operate for the foreseeable future. As a result, if there is no going concern problem, it is considered sensible to keep to the use of the historical cost concept when arriving at the valuations of assets. (viii) Periodicity Concept The periodicity concept states that the entity or the business needs to carry out the accounting for a definite period, usually the financial year. The period for drawing financial statements can vary from monthly to quarterly to annually. It helps in identifying any changes occurring over different periods. (ix) Matching Concept The matching principle of Accounting guides the accounting. It means that the expenses entered into the debit side of the accounts should have a corresponding credit entry (as required by the double-entry bookkeeping system of accounting) in the same period, irrespective of when the actual transaction is made. All the expenses should be recorded in the period’s income statement in which the revenue related to that expense is earned.(x) conservatism concept Conservatism Principle is a concept in accounting under GAAP that recognizes and records expenses and liabilities- uncertain, as soon as possible but recognizes revenues and assets when they are assured of being received. It gives clear guidance in documenting cases of uncertainty and estimates. The principle of Conservatism is one of the major accounting principle and guidelines listed under UK GAAP which is a regulatory body of policies and standards of accounting that all accountants across the globe need to follow while reporting the business's financial activity. The principle of Conservatism is mostly concerned with the reliability of the financial statements of a business entity. (xi) Consistency The accounting policies are followed consistently to achieve the intention of comparing the financial statements of various periods or for that matter of multiple entities. Consistency concept says that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way. . Each business should try to choose the methods which give the most reliable picture of the business. Constantly changing the methods would lead to misleading profits being calculated eg if one method is used in one year and another method in the next year, and so on.()) Prudence The prudence concept requires that the financial statements are ‘neutral’, that is, that neither gains nor losses should be overstated or understated. The accountant should make certain that assets are not valued too highly. Similarly, liabilities should not be shown at values that are too low. Otherwise, people might lend money to a business, which they would not do if they had been provided with the proper facts. The accountant should always exercise caution when dealing with uncertainty while, at th same time, ensuring that the financial statements are neutral - that gains and losses are neither overstated nor understated - and this is known as prudence. It is true that, in applying the prudence concept, an accountant will normally make sure that all losses are recorded in the books, but that profits and gains will not be anticipated by recording them before they should be recorded.