Basic Rules Guiding the Preparation of Accounts and Financial Statements of an Entity.

Topics: Business, Balance sheet, Generally Accepted Accounting Principles Pages: 3 (859 words) Published: August 1, 2011
Names: Adebayo, Aderemi Matthew Olasoji
Post Graduate School, Nigeria Defence Academy, Kaduna, Nigeria. Course: DAF 501
Assignment: Write on accounting concepts.
Answer to Question.
Accounting concepts and conventions: Can be defined as the ground rules of accounting that are followed in the preparation of all accounts and financial statements of an entity. In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities. To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently. Accounting Conventions

The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy. The other conventions are summarised as below:

Monetary measurement| Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.| Separate Entity| This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. This seeks to recognise a business as a separate legal entity...
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