Week 02.

Basic Accounting Concepts:

Generally accepted accounting principles (GAAP): Means the explicit framework within which
accounting is practiced. A guide to the accounting profession in the choice of accounting techniques and
the preparation of financial statements. The conventions, rules and procedures included in GAAP have
substantial authoritative support.
Major sources of GAAP in the USA:
Financial Accounting Standards Board (FASB), Statements of Financial Accounting Standards
(SFAS),Accounting Principles Board (APB) opinions, The American Institute of Certified Public
Accountants (AICPA), Accounting Research Bulletins (ARBs).
Sources of Australian GAAP:
Australian Corporations Law, Approved Accounting Standards Board (AASB) ,Australian
Accounting Standards (AASs), Statements of Accounting Concepts (SACs), Exposure Drafts (EDs),
Accounting Guidance Releases (AGRs), ASIC practice notes and policy statements.
Where Australian GAAP differs from US GAAP:

 The LIFO method of valuing inventory is not allowed in Australia.

 The liability method of accounting is used for deferred taxes in Australia
 The pooling-of-interests method of accounting for business combinations is not allowed
in Australia.

 Changes in accounting policies or new accounting standards cannot be applied

retroactively in Australia.

 Non-current assets can be revalued to market value in Australia.

 Other current-value regulations are more widespread in Australia than in the USA.

 The recognition criteria for assets, liabilities, revenue and expenses are less stringent
(severe) in Australia than in the USA.

1. Entity Concepts:
The accountant keeps all of the business transactions of a sole proprietorship separate from the business
owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be
one entity, but for accounting purposes they are considered to be two separate entities.
This theory views the entity as something separate and distinct from those who provide capital to the
entity. This view sees the business unit, rather than the proprietor, as the center of accounting interests.
Assets =liabilities+ owner’s equity.
2. The objectivity principle:
• This principle holds that the usefulness of financial information depends on the reliability of the
measurement procedure used
• There are different interpretations of this objectivity:

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 – an objective measurement is an impersonal measure.
– an objective measurement is a very viable measurement
– an objective measurement is the result of consensus among a given group of observers
– the size of the dispersion of the measurement distribution may be used as an indicator of
the degree of objectivity

3. Cost Principle:
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash
equivalent) when an item was originally obtained, whether that purchase happened last year or thirty
years ago. For this reason, the amounts shown on financial statements are referred to as historical cost
amounts.
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a
general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset
amount does not reflect the amount of money a company would receive if it were to sell the asset at
today's market value. (An exception is certain investments in stocks and bonds that are actively traded on
a stock exchange.) If you want to know the current value of a company's long-term assets, you will not
get this information from a company's financial statements–you need to look elsewhere, perhaps to a
third-party appraiser.
OR
• The acquisition cost or historical cost is the appropriate valuation basis for recognition of the
acquisition of all goods and services, expenses, costs and equities
• The cost principle is justified both in terms of its objectivity and the going-concern postulate:
– acquisition cost is objective, verifiable information
– the entity will continue indefinitely, therefore current values or liquidation values for
asset valuation are not necessary

4. The going-concern postulate:

accounting principle assumes that a company will continue to exist long enough to carry out its objectives
and commitments and will not liquidate in the foreseeable future. If the company's financial situation is
such that the accountant believes the company will not be able to continue on, the accountant is required
to disclose this assessment.
The going concern principle allows the company to defer some of its prepaid expenses until future
accounting periods.. OR

• This postulate holds that the business entity will continue its operations long enough to recognize
its projects, commitments and ongoing activities.

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 • The postulate assumes that the entity is not expected to be liquidated in the foreseeable future or
that the entity will continue for an indefinite period of time.

5. The stable currency Assumptions:

 One aspect of the monetary unit assumption is that currencies lose their
purchasing power over time due to inflation, but in accounting we assume that
the currency units are stable in value. This is alternatively called stable dollar
assumption.

Ethics-the –Most Fundamental Principle of Accounting:

A professional accountant shall comply with the following fundamental principles: ...

Objectivity –

To not allow bias, Conflict of interest or undue influence of others to override professional or
business judgments.

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