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Concepts for Financial Accounting

Concepts for Financial Accounting. By Jessica Huff. Useful Information. Relevance. Material needs to relevant Financial statements and accounting information are relevant Something like gossip to coworkers is not relevant Timely

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Concepts for Financial Accounting

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  1. Concepts for Financial Accounting By Jessica Huff

  2. Useful Information

  3. Relevance • Material needs to relevant • Financial statements and accounting information are relevant • Something like gossip to coworkers is not relevant • Timely • Would want to record things and turn in reports soon after they happen, not several years down the road

  4. Reliability • Information must able to be depended on • It must be verifiable • Basically that there are no errors • The information cannot be biased • Something like only reporting good things that happened during a year instead of the bad

  5. Comparability • This idea isn’t so much a requirement, but a statement • Companies have certain formats they follow in order to report their information • This concept is just saying that statements are generally comparable because of these similar formats

  6. Consistency • This is a very important concept • Information needs to be consistent from year to year • This will help certain governmental bodies know that a company is not trying to play the system • If a company switches methods every year, this does not make the statements comparable, and it negates relevancy and reliability

  7. Assumptions and Principles

  8. Monetary Unit Assumption • This assumption just states that only money numbers will be reported in the accounting records • So, something like cash and land is reported but not something like disagreements in the office or customer satisfaction

  9. Economic Assumption • This assumption just states that every transaction can be identified and separated from other transactions • This would be like separating the Petty Cash and Cash Equivalents from the Cash account or being able to separate different divisions of a company instead of as a whole

  10. Time Period Assumption • This just states that the life of a business can be separated into periods • Income Statement, Retained Earnings, and the Cash Flow Statement all are for that year • Balance Sheet is for a specific point in time • Many companies report statements quarterly, but all are required to report statements annually

  11. Going Concern Assumption • This assumption just assumes that a business will be in operation for a whole year whether or not it actually is • Many business fail within the first couple of years, so it this assumption is important to establish • If accountants assume that a business will not remain operating, then there is less incentive to be productive • If it is assumed that the business will be in operation, accountants will do their best

  12. Cost Principle • This is an important principle because it is used in accounting a lot • It just means that assets are going to be reported at cost • So, if a company buys a building, it will be for the cost of the building not the fair value (also called market value) if different • ASSETS WILL NEVER BE WRITTEN UP IF THE FAIR VALUE INCREASES- ONLY IF THE FAIR VALUE GOES DOWN

  13. Full Disclosure Principle • This requirement is for companies to fully disclose anything that happens within the reporting period even if it’s bad • This reflects in materiality (discussed in three slides) • So, if something is considered to be important to the statements, it must be reported in full

  14. Accounting Constraints

  15. Materiality • Materiality has to do with affecting the financial statements significantly • Amounts are reported separately if they are material and bunched in another category if not material • If someone steals $10 dollars when a company makes $10 billion a year, this amount is not considered material and will not be reported • However, if the same company loses $5 million in a natural disaster, this is considered material • This will affect the financial statements significantly, so it is reported

  16. Conservatism • This constraint helps accountants more accurately represent the information being presented • So, accountants should choose the methods that are least likely to overstate assets or income • Methods for something like Inventory or Allowances for Doubtful Accounts • Overstating is used because it is considered worse to make a company look better than it is rather than making the company look worse than it is by understating

  17. Timing Issues

  18. Revenue Recognition • This principle requires that companies recognize revenue in the period that it is earned • So, you wouldn’t reported something that happened March 31, 2010 on December 31, 2009 statements

  19. The Matching Principle • Expenses are recognized with Revenues • This could be salaries being paid in the year they occur or otherwise written as a payable • This could also be rent expense being recorded at the time rent is being used

  20. Conclusion • Concepts are important because they provide guidelines in accounting • Other than when they are mentioned, most of these concepts are not introduced again, but they are still important to learn • It provides a base of learning in accounting • Many of them are assumptions to provide boundaries, but some like the cost principle, materiality, and revenue recognition are those that will be used constantly

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