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The Basic Concepts: Accounting Theory Lecture 2 December 18, 2016

The document discusses key concepts in accounting theory. It outlines several basic concepts used as the basis for accounting standards and practices, including the going concern assumption and matching principle. It also discusses Paton and Littleton's early work establishing a conceptual framework for accounting standards, which identified objectives, fundamentals, and six key concepts: the business entity, continuity of activity, measured consideration, cost attachment, effort and accomplishment, and verifiable objective evidence. The conceptual framework provides the objectives and fundamentals that help financial reporting achieve its goals.

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Arya Utama
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25 views

The Basic Concepts: Accounting Theory Lecture 2 December 18, 2016

The document discusses key concepts in accounting theory. It outlines several basic concepts used as the basis for accounting standards and practices, including the going concern assumption and matching principle. It also discusses Paton and Littleton's early work establishing a conceptual framework for accounting standards, which identified objectives, fundamentals, and six key concepts: the business entity, continuity of activity, measured consideration, cost attachment, effort and accomplishment, and verifiable objective evidence. The conceptual framework provides the objectives and fundamentals that help financial reporting achieve its goals.

Uploaded by

Arya Utama
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Accounting Theory Lecture 2

December 18, 2016

THE BASIC CONCEPTS


CONCEPT
A basic concept in accounting is an
assumption, principle, postulate, or
convention that is used as a basis of
reasoning for certain accounting standard
or practice.
EXAMPLES

GOING CONCERN is an assumption that an entity will


continue to exist in the future.
MATCHING is a principle that dictates that revenues and
expenses should be recognized in the same period.
An ARRAY of BASIC CONCEPTS
Accrual
Decision
Materiality Usefulness
Comparability
Historical Cost

Full Disclosure Fair Value


Relevance

Faithful
Verifiability Representation

Going Concern Business Entity


Assumption
Matching
wow ... looks messy or what ...
THE CONCEPTUAL FRAMEWORK
FASB (1978): The Conceptual Framework (or
“Concepts Statements”) is a body of interrelated
objectives and fundamentals.
– The objectives identify the goals and purposes of financial
reporting and
– the fundamentals are the underlying concepts that help
achieve those objectives.
The “Houses” of Basic Concepts

Qualitatitive
Objectives of Elements of Recognition
Characteristics
Financial Financial and
of Accounting
Reporting Statements Measurement
Information
Some HISTORY
AN INTRODUCTION TO CORPORATE
ACCOUNTING STANDARDS
American Accounting Association 1940

William Andrew Paton


(July 19, 1889 - April 26, 1991)

Ananias Charles Littleton


(December 4, 1886 – January 13, 1974)
Paton and Littleton STANDARDS
• A consistent framework of standards is needed to
serve as a basis for judgment in constructing and
interpreting financial statements.
• Accounting standards should be systematic and
coherent, impartial and impersonal, and in harmony
with observable, objective conditions.
Paton and Littleton CONCEPTS
The Six CONCEPTS and A Set of Assumptions:
– The Business Entity
– Continuity of Activity
– Measured Consideration
– Costs Attach
– Effort and Accomplishment
– Verifiable Objective Evidence
– Assumptions
• Rational business conduct
• Stable monetary unit
• Periodicity
The BUSINESS ENTITY CONCEPT

A business is a separate entity from its owners

The business entity concept states that the


transactions associated with a business must be
separately recorded from those of its owners.
Reporting Entity
• The IASB: A reporting entity is a circumscribed area
of business activity of interest to existing and
potential equity investors, lenders and other
creditors. It includes, but is not limited to, business
activities that are structured as legal entities.
THE CONTINUITY OF ACTIVITY CONCEPT

In the absence of contrary evidence, entities are


assumed to continue to exist the future. Also
known as the Going Concern concept.

CONCERN?C
ONTRARY
EVIDENCE?
THE MEASURED CONSIDERATION CONCEPT

• Transaction should be recorded at the


measured consideration, or price-aggregate,
because it represent the value agreed by both
buyer and seller at the date of the transaction.
• It is similar to the historical cost concept.

CONSIDERATION?
HISTORICAL COST?
THE COST ATTACH CONCEPT
• Cost has the ability to attach to other cost to
form a “joint” cost.
• Example: Material, labor, and overhead costs
can merged together to form a product cost.
• Hence: Costs attach to the product or asset in
question. If the product leave the company, its
costs must also leave with it.
THE EFFORT AND ACCOMPLISHMENT CONCEPT

• P&L: “... the principal concern of accounting is


the periodic matching of costs and revenues
as a test reading by which the effect of the
efforts expended.”
• Costs represent EFFORT and revenues
represent ACCOMPLISHMENT.

Revenues should be matched in the same period


against all expenses that created those revenues.
THE VERIFIABLE, OBJECTIVE EVIDENCE CONCEPT

• Accounting information should based on


evidence.
• P&L: “Evidence is a means of ascertaining the
truth or of furnishing proof.”

As a note: Today we agree that objectivity and


verifiability are important characteristics that make
accounting information useful.
ASSUMPTIONS
• Profit motives
• Rational business conducts
• Periodicity
• Stable monetary unit
Next: Back to The Conceptual Framework

Objectives

Qualitative Characteristics

Definition of Elements

Recognition and Measurement

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