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Learning Guide: Accounts and Budget Service
Learning Guide: Accounts and Budget Service
Learning Guide
Unit of CompetenceApply Principles of Professional Practice to Work
in the
financial services industry
INTRODUCTION
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.
Objectives
of
Financial accounting
Qualitative Elements
Characteristics of financial
of accounting statements
Information
Recognition and
Measurement guide lines
Conceptual Framework
Objectives of financial reporting relate to the type of information that is helpful far
external users in investment and credit decision making. The major interest being
"who needs, what kind of information and for what purposes"
In response eight objective of financial reporting are identified enlisted from more
general to specific as follows:
Decision usefulness
Ingredients of
Primary
Qualities
Productive Timeliness Verifiability Representation
Value of faithfulness
Secondary qualities
The usefulness of information enhance when the secondary qualities are
achieved in addition to the primary qualities indicated. The secondary qualities
compose comparability and consistency.
A. Comparability
This involves the quality of information being compared with similar
information about another enterprise. This is inter-company comparison that
enables user to identify and explain similarities and differences between
enterprises. It also enable to identify favorable and unfavorable trends
happening in a given enterprise over periods.
B. Consistency
This is the feature of information being compared across periods about the same
enterprise. This deals with inter-company comparison. Accounting information
will be consistent if accounting policies and procedures remain unchanged and
confirm from period to period. However, change in accounting methods may be
desirable due to change in the economic condition or issuance of new preferable
accounting methods.
Comparability and consistency are very much independent each other as
consistency are an important condition that enhances comparability across
periods. That is financial information to be comparable; accounting methods
should be applied consistently from period to period.
Cost-effectiveness-pervasive constraints
This is a pervasive constraint affecting all informational qualities. For
information to be considered, It should be ensured that the benefits to be
achieved from using the information should exceed the cost of obtaining the
information given if the information meets all the qualitative characters tics
mentioned.
Equity:-is the residual interest in the assets of an entity that remains after
deducting its abilities. In business enterprises, the equity is the ownership interest.
producing goods, rendering services, or other activities that constitute the entity's
ongoing major or central operations.
All business entities are considered as a separate and distinct from their
owners and any other business unit, regardless of the legal consideration
given for various forms of business organizations. Thus, the economic
activities of a business enterprise should be reported separate and distinct
from its owners and any other business unit.
This assumes on indefinite life existence of a business entity, long enough to carry
out its presented plans and contractual commitments. But, it doesn’t imply that a
business entity would remain permanently.
Normally, it is assumed that assets will be used in the future operations of the
business and allocated as expense (as depreciation and amortization for instance)
only when consumed. Thus, no need arises to express them in terms of their
current market values.
D. Periodicity Assumption
accurately upon its liquidation. However, for the sake of providing periodical
financial reporting to financial statement users (both internal and external), the
economic activities of an enterprise can be divided into artificial time periods
carried fiscal periods. These vary to be months quarter, semi annuals or years.
A. Objective Principle
Data entered into the accounting records and later reported on the financial
statements must be supported by objectively determinable evidence.
B. Historical cost principle
This deals with when revenues should be recognized and, thus, determining the
critical event that indicates revenue is realized and justifies recoding the changes in
Realization of revenue
Revenues are realized when products (goods or services), merchandize, or other
assets are exchanged for cash or claims to cash. Revenuers are realizable when
assets received or held are readily convertible when they are salable of
interchangeable in a market at readily determinable prices with significant
additional cost.
Earning of Revenue
Revenue is said to be earned when the seller substantially accomplishes its
performance or obligations that would entitle the seller to the benefits represented
by the revenues.
Revenue realization principle is related with valuation principle for the case it
suggests that assets (such as inventory) should be carried at their historical cost
until appreciation in value in realized through sales. After realization, valuations of
monetary assets received in exchange for productive assets approximate their
current fair values.
D. Matching Principle
In an attempt to measure the periodic income properly, appropriate recognition of
revenues and exposes should be made. Thus, after revenue for a given period is
determined in the line with revenue recognition principle, the next crucial point
TTLM Development Manual Date: October 12,2013
Compiled by: Frehiwotgidey, Acct department
Soloda Health and Technology
Training, Teaching and Learning Materials
E. Accrual principles
Revenue should be recorded when earned regardless of collection of cash.
Expenses should be recorded when incurred or when assets are consumed
regardless of payment of cash. In short, revenues or expenses are recognized at a
time earned or incurred.
F. Disclosure Principle
Financial statements should be complete. by disclosing all information that is
significant enough to influence the judgment and decisions of users. This is
essential This is essential as omission of certain information misleads financial
statement users.
Notes to the financial statements explain the items ,presented in the body of the
financial statements; such as:
Significant subsequent events that occur after the balance sheet date until
financial statements are issued.
The disclosure principle doesn't require listing all available information. Further,
precision (reporting exact dollar amounts) is not necessarily expected. Rather only
significant items to influence the decision of information users are disclosed and
approximation of figures is possible
information;
Facts and circumstances among enterprises or industries may differ;
The accounting theory should be applied differently under conditions of
uncertainty.
Cost-benefit Relationship
As indicated earlier, in providing information with the qualitative characteristics,
accounting principles are applied strictly if the information they provide is more
beneficial than the costs incurred in applying the principles. The benefits of
applying the accounting theory should exceed (in times equal to) the costs.
Materiality
An item is considered to be material, if, in the light of surrounding circumstances,
the magnitude of the item omitted or misstated in financial reporting is such that
the judgment of a reasonable person relying upon the report would have been
changed or influenced by the inclusion or correction of the item.
To the contrary, an item is considered as immaterial if its omission have no impact
on decision makers.
Thus, the constraint of materiality applies in manner that diversion from pre-set
accounting theories or principles is "Owed if the item is considered to be
immaterial; while the accounting principle is strictly applied if the amount is
determined to be material.
Two factors should be considered in deciding whether a given item is material
TTLM Development Manual Date: October 12,2013
Compiled by: Frehiwotgidey, Acct department
Soloda Health and Technology
Training, Teaching and Learning Materials
(deserving strict application of the GAAPs) or immaterial (that diversion from the
GAAPs is possible):
Relative size of the item. This is consideration for the quantitative nature by
observing the relationship between the item and key financial variables such
as asset, liability, owner's equity, revenue, expense, net income, etc. Thus,
an item determined to be material for a given firm may be immaterial for
another with larger magnitude of the financial variables mentioned.
Basic nature of the item. This is qualitative consideration such as contractual
violation or representation of illegal acts of certain transactions
However, it is not always possible to put a clear line in demarcating an item is
either material or immaterial in a tangible manner. Thus, the concept of materiality
requires exercising judgment and professional expertise of individuals.
Industry Practices
This involves modifications of accounting principles necessitated by the unusual
characteristics of some industries. These modifications are part of the GAAP as
they enhance the usefulness o~ information provided given the peculiar nature of
some industries and business concerns
For example, recognition of revenue before the point of sale using percentage-of
contract-completed revenue recognition method is allowed for companies in the
construction industry. This is modification to revenue recognition principle that
dictates point of sale revenue recognition: when it is realized and earned.
Conservatism
This is a modifying convention to be applied in times of doubt or uncertainties
dictating to choose the alternative that is least likely to overstate assets and income.