The building blocks of Accounting

Ethics in Financial reporting

Let's define Ethics

Standards of conduct by which one's actions are judged as right or

wrong, honest or dishonest, fair or not fair, are Ethics

Effective Financial Reporting depends on sound ethical behavior .

How to deal with an ethical situation :

1. Recognize an ethical situation and the ethical issues involved .

2. Identify and analyze the principal elements in the situation .
3. Identify the alternatives , weight the impact of each on various
stakeholders

Accounting standards
International Accounting Standards Board (IASB) Financial Accounting Standards Board (FASB)

leads to leads to

International Financial Reporting Standards (IFRS) Generally Accepted Accounting Principles (GAAP)

Measurement Principles
Historical Cost
Fair Value Principle
Principle
Dictates that companies States that assets and liabilities should be
record assets at their reported at fair value (the price received to sell
cost. an asset or settle a liability).
 Which uses Which

International Financial Reporting Standards (IFRS): Primarily

uses the Fair Value Principle for the valuation of assets and
liabilities. This approach aims to provide a current market value for
most assets and liabilities, making financial statements more
relevant but also more volatile.
Generally Accepted Accounting Principles (GAAP): Primarily
uses the Historical Cost Principle for the valuation of assets and
liabilities. This approach records assets and liabilities at their
original cost and generally only recognizes gains or losses in value
when an asset is sold or impaired.

Assumptions
Monetary Unit Assumption
Requires that companies include in
the accounting records only
transaction data that can be
expressed in terms of money.
Economic Entity Assumption
Requires that activities of the entity
be kept separate and distinct from
the activities of its owner and all
other economic entities.

Which is Which

Both the Monetary Unit Assumption and the Economic Entity

Assumption are fundamental accounting assumptions that are
generally accepted and used in both IFRS (International Financial
Reporting Standards) and GAAP (Generally Accepted Accounting
Principles).

Fors of Business ownership

 Forms of Business Ownership

Proprietorship Partnership Corporation

Proprietorship Partnership Corporation

Owned by two Ownership
Ownership Owned by one person or more divided into
persons shares
Separate legal
Often retail and
Type of Owner is often entity organized
service-type
Business manager/operator under
businesses
corporation law
Owner receives any
Generally
profits, suffers any
Profit/Loss unlimited
losses, and is Limited liability
& Liability personal
personally liable for all
liability
debts
Not applicable
Yes
as it's a
Partnership Not applicable as there (Partnership
separate legal
Agreement is only one owner agreement is
entity with
often in place)
shares

Additional Notes
Convergence refers to efforts to reduce differences between IFRS and
GAAP .
Relevance means that financial information has the ability to influence
the economic decisions of users by helping them evaluate Past,
Present, or Future events or Confirms, or Corrects their past
evaluations
Next section : The Basic Accounting Equation