CAVENDISH UNIVERSITY – ZAMBIA

ASSIGNMENT BRIEF AND FEEDBACK FORM

STUDENT No. 115-078

LECTURER: SYLVAN MAKONDO

MODULE PRINCIPLES OF FINANCIAL ACCOUNTING

MODULE CODE:
AC 111
ASSIGNMENT NUMBER:
01

DATE HANDED OUT: 11TH MARCH 2024

DATE DUE IN: Friday, 12th April, 2024

ASSIGNMENT BRIEF

Explain how the following principles are important in the preparation of financial statements.
The principles are: Going Concern; Accrual and Materiality Principle; Objectivity and Prudence
Concept; Substance over form principle; Equity Principle.

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Table of Contents
Introduction .............................................................................................................................................................1
Going Concern Concept ..........................................................................................................................................1
Accrual Principle .....................................................................................................................................................1
Materiality Concept .................................................................................................................................................2
Objectivity Principle ................................................................................................................................................2
Prudence Concept ....................................................................................................................................................3
Substance over Form Principle ................................................................................................................................3
Equity Principle .......................................................................................................................................................4
Conclusion ...............................................................................................................................................................4
REFERENCES ........................................................................................................................................................5

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Introduction

Accounting concepts are fundamental principles that guide the preparation and presentation of
financial statements. These concepts provide a framework for recording, analyzing, and reporting
financial information in a consistent and reliable manner (Belkaoui, 1981). They ensure that financial
statements accurately reflect the financial position, performance, and cash flows of an organization.
The purpose of this exposition is to explain various accounting concepts and briefly explaining their
importance in the preparation of financial statements.

Going Concern Concept

The going concern concept is a fundamental principle in accounting that assumes a company will
continue to operate indefinitely, without the intention or necessity of liquidation or ceasing operations
(Bernstein, 1978). In other words, it implies that the company will be able to carry out its objectives
and commitments in the foreseeable future. The importance of this concept in the preparation of
financial statements is briefly explained below:

Accurate Representation: Financial statements prepared under the going concern assumption provide
a more accurate representation of the company's financial position, performance, and cash flow. This
assumption allows for the inclusion of assets and liabilities at their historical cost rather than at
liquidation value.

Comparability: The going concern assumption facilitates the comparability of financial statements
over time. This is important because by assuming continuity in operations, stakeholders can better
analyze trends, evaluate performance, and make meaningful comparisons between different periods.

Accrual Principle

The accrual concept, also known as the accrual basis of accounting, is a fundamental accounting
principle that requires transactions to be recorded when they occur, regardless of when the associated
cash is exchanged (Wood and Sangster, 2000). In other words, revenues are recognized when they are
earned, and expenses are recognized when they are incurred, irrespective of the timing of cash flows.
The importance of this concept in the preparation of financial statements is briefly explained below:

Accurate Matching of Revenues and Expenses: The accrual concept ensures that revenues are
recognized in the period in which they are earned and expenses are matched to the revenue they help
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generate. This matching principle provides a more accurate depiction of a company's financial
performance during a specific period.

True Financial Position: Accrual accounting provides a clearer picture of a company's financial
position by including all assets, liabilities, revenues, and expenses that have been incurred, regardless
of the timing of cash flows (Belkaoui, 1981). This allows stakeholders to assess the company's overall
financial health more accurately.

Materiality Concept

The materiality concept is a fundamental accounting principle that states that financial information
should be disclosed if omitting it or misstating it could influence the decisions of users of the financial
statements. In simpler terms, it means that only significant or material items should be included in the
financial statements, while immaterial items can be disregarded (Wood and Sangster, 2000).
According to this concept, information is material if its omission or misstatement could influence the
economic decisions of users. Materiality depends on the size of the item or error judged in the
particular circumstances of its omission or misstatement. The importance of this concept in the
preparation of financial statements is briefly explained below:

Relevance: Materiality ensures that only information that is relevant to users of the financial
statements is included (Bernstein, 1978). Users of accounting information need to know about
significant transactions, events, and balances that could impact their decision-making.

Accuracy: Focusing on material items helps ensure the accuracy of financial statements. It allows
accountants to concentrate their efforts on verifying and reporting on the most significant aspects of an
organization's financial position and performance.

Objectivity Principle

The objectivity concept, also known as the principle of objectivity or neutrality, is a fundamental
accounting principle that emphasizes the importance of presenting financial information free from
bias, personal opinions, or undue influence (Bernstein, 1978). It requires that financial statements be
prepared based on verifiable evidence and that accounting professionals’ exercise professional
judgment without allowing personal bias or external pressures to influence their decisions. The
importance of this concept in the preparation of financial statements is briefly explained below:

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Impartiality: Objectivity ensures that financial information is presented impartially, without favoring
any particular stakeholder or interest group. This helps maintain the integrity and credibility of the
financial reporting process (Bernstein, 1978).

Reliability: Objectivity enhances the reliability of financial statements. By relying on objective

evidence and professional judgment, accountants can produce financial reports that accurately
represent the financial position and performance of an organization.

Prudence Concept

The prudence concept, also known as conservatism, is an accounting principle that suggests caution in
recognizing revenues and assets, while simultaneously ensuring that all liabilities and expenses are
recognized as soon as they are probable and measurable (Glautier & Underdown, 1986). In simpler
terms, it advises accountants to err on the side of caution, being conservative in their estimations and
assumptions. The importance of this concept in the preparation of financial statements is briefly
explained below:

Risk Mitigation: Prudence helps mitigate the risk of overestimating profits or assets and
underestimating liabilities or expenses (Wood and Sangster, 2000). Through the adoption of this
cautious approach, accountants can avoid overstating the financial position and performance of an
organization.

Credibility and Reliability: The application of prudence enhances the credibility and reliability of
financial statements (Bernstein, 1978). Stakeholders, such as investors and creditors, are more likely to
trust financial information that reflects a conservative assessment of the organization's financial
position and performance.

Substance over Form Principle

The legal form of a transaction can differ from its real substance and as such transactions and other
events must be accounted for and presented in accordance with their substance and economic reality
and not merely their legal form (Bernstein, 1978). The substance over form concept is an accounting
principle that emphasizes the economic reality of transactions over their legal form. It requires that
transactions and events be recorded and reported in financial statements based on their economic
substance rather than solely on their legal form or documentation. The importance of this concept in
the preparation of financial statements is briefly explained below:
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Economic Reality: The concept focuses on capturing the underlying economic substance of
transactions. This means that accountants should look beyond the legal structure or formalities of a
transaction to understand its true economic impact on the organization (Hendriksen, & Van Breda,
1992).

Fair Presentation: By prioritizing substance over form, financial statements aim to provide a fair and
accurate representation of an organization's financial position and performance. This ensures that users
of financial statements have a clear understanding of the economic realities underlying the reported
figures.

Equity Principle

The equity concept, also known as the ownership interest or shareholder's equity, represents the
residual interest in the assets of an entity after deducting liabilities (Glautier & Underdown, 1986). In
simpler terms, it is the value attributable to the owners of the company after accounting for all debts
and obligations. The importance of this concept in the preparation of financial statements is briefly
explained below:

Ownership Stake: Equity represents the ownership interest of the shareholders in the company. It
reflects their claim on the assets of the company after all liabilities have been settled.

Balance Sheet Presentation: Equity is a key component of the balance sheet, where it is typically
presented as shareholder's equity or owner's equity. It provides important information about the
financial health and value of the company to investors, creditors, and other stakeholders (Hendriksen,
& Van Breda, 1992).

Conclusion

In a nutshell, accounting concepts serve as the bedrock upon which the preparation of financial
statements rests. These fundamental principles provide guidance to accountants in recording,
analyzing, and reporting financial information accurately and reliably. The importance of these
concepts cannot be overstated, as they ensure that financial statements present a true and fair view of
an organization's financial position, performance, and cash flows.

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 REFERENCES

Belkaoui, A. R. (1981) Accounting Theory. New York: Harcourt Brace Jovanovich.

Bernstein, L. A. (1978) Financial Statement Analysis. Homewood, Ill.: Richard D Irwin.

Glautier, G. W. E. & Underdown, E. (1986) Accounting Theory and Practice. London: Longman.

Hendriksen, E. S. & Van Breda, M. F. (1992) Accounting Theory. 5th ed. Boston: Irwin.

Wood F and Sangster, A (2000) Business Accounting 1, London: Prentice Hall