Summary of Accounting Theory

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BALANCING RELEVANCE & RELIABILITY
Para 32
-Information might be relevance but so unreliable in nature or representation that its recognition may be potentially misleading. Constraints
-Timeliness
-Balancing cost and benefit – Financial information will be sought if the benefit to be derived from the information exceeds its costs.

Para 44
-Benefit derived from its information should exceed the cost of providing it

General Purpose Financial Reporting
Objective
SAC 2 – focus on providing info to meet the common info need of users who are unable to command the preparation of reports tailored to their particular info needs.
primary obj - To provide relevant info to ext users.

Elements
-Assets
-Liabilities
-Equity
-Expenses
-Income
SFAC 3= Investment, Distribution ,Revenue, Gain & Losses. REPORTING ENTITY
SAC 1
‘entities (including economic entities) in respect of which it is reasonable to expect the existence of users dependent on GPFR for info which will be useful. Existence of RE will not depend on
-the sector within which the -entity operates
-The purpose for which the entity was created
-The manner in which the entity is constituted.
Conceptual framework
Problem
-Lack of a general theory
-Permissiveness of accounting practice
-Inconsistency of practices

Needs
-2 or more methods of accounting are accepted for the same facts -Reserves are used to artificially smooth earnings fluctuations -Deferrals are followed by ‘big bath’ write offs

A set of inter related concepts which will define the nature, subject, purpose and broad content of financial reporting.

{
Asset- future economic benefit controlled by the entity, past transaction, other past events, expected to flow to the entity. 3 characteristic
-must be an expected future economic benefit
-the reporting entity must control the future economic benefit -transaction or other past event giving rise to the reporting entity ‘s control must have occurred...
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