UGBS 205

Fundamentals of Accounting Methods

Week 2 – Accounting concepts, principles, bases and standards

College of Humanities
Business School
2016/2017
 Overview
• The different users of financial information and their
information needs make it necessary that a common
framework for the preparation and presentation of
information in the financial statement be adopted. This is
important because the different users of financial information
have different interests. This session seeks to introduce
students to the general concepts, principles, bases and
standards underlying the preparation of financial statements.

Bekoe, Asare, Donkor and Appiagyei, UGBS Slide 2

 Learning Objectives
• At the end of this session, you should be able to
– Explain the conceptual framework of accounting
– Identify the elements in the International Accounting
Standard Board’s (IASB’s) conceptual framework of
accounting
– State and explain the qualitative characteristics of
accounting information
– Explain accounting standards and their importance
– Explain and apply the fundamental concepts and principles
of accounting
– Explain the different bases of accounting
Bekoe, Asare, Donkor and Appiagyei, UGBS Slide 3
 Reading List
• Read Chapter 10 of Recommended Text –
– Chapters 2 & 3 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapter 10 of Wood, F. & Sangster, A. (2008). Frank Wood’s Business
Accounting 1. Volume 1. Pearson Education.

• Other Financial Accounting text books available to students

Bekoe, Asare, Donkor and Appiagyei, UGBS Slide 4

 Conceptual Framework
Statement
of for
Framework
principles
setting
which
accounting
standards
provide
generally
accepted
guidance
for the
developme
nt of new
No repetition reporting Basis for
of practices resolving
Fundamental
principles
and for disputes
challenging
and
evaluating
the existing
practices
Bekoe, Asare, Donkor and Appiagyei, UGBS 5
Elements of the IASB’s Framework

Measure Users of
Accounting
ment Information

IASB’s
Framewor
Recognit k
Information
al needs of
ion Users

Characteristic Kinds of
s of Financial Financial
Statements Statements

Bekoe, Asare, Donkor and Appiagyei, UGBS 6

 Qualitative Characteristics of
Accounting Information
• Influence user’s
• Complete
decisions • Faithful
• Predictive value
• Confirmatory representation
• Neutrality
value • Prudence
• Timeliness

RELEVANCE RELIABILITY

COMPARABILITY
UNDERSTANDA
BILITY
• Similarities and
differences can be
discerned and • Explain complex
evaluated
• Consistency matters
• Disclosure of
accounting policies

Bekoe, Asare, Donkor and Appiagyei, UGBS 7

 Generally Accepted Accounting Principles
(GAAP)

Bekoe, Asare, Donkor and Appiagyei, UGBS 8

 Accounting Concepts and Principles

Accounting Concepts

• Broad assumptions, which underlie the preparation of periodic financial

accounts of business enterprises.

Accounting Principles

• General decision rules derived from the objectives and the theoretical
concepts of accounting that govern the development of accounting
techniques

Bekoe, Asare, Donkor and Appiagyei, UGBS 9

 Accounting Techniques and Bases

Accounting Techniques

• Specific rules derived from accounting principles that account for specific
transactions and events faced by the entity. E.g. provision for depreciation

Accounting Bases

• These are particular methods which have evolved and developed for
expressing or applying the concepts of the recording of financial
transactions e.g. depreciation methods

Bekoe, Asare, Donkor and Appiagyei, UGBS 10

 Accounting Policies and Standards

Accounting Policies

• The specific accounting principles and methods of applying those

principles judged by business entities to be most appropriate to
their company’s circumstances and adopted in the preparation and
presentation of their financial statements.

Accounting Standards

• Provide guidelines relating to the accounting treatment as well as

reporting of important accounting items with a view to standardize
the diverse accounting procedures or policies
Bekoe, Asare, Donkor and Appiagyei, UGBS 11
 APPLICABLE ACCOUNTING STANDARDS

Ghana
International Financial Reporting
Standards (IFRS)

International Public Sector

Accounting Standards (IPSAS)

International Standards on Auditing

Bekoe, Asare, Donkor and Appiagyei, UGBS 12

 Fundamental Accounting Concepts

Going •A business will continue in operational existence for the

foreseeable future, and that there is no intension to put
Concern the company into liquidation or to cease its operations.
•Assets of the business should not be valued at their

Concept realizable/saleable value.

Accrual •The effects of transactions and events should be

recognised when they occur and recorded in the
(Matching) accounting books and reported in the financial
statements in the period in which they relate.
Concept •Basis for preparation of financial statements

Bekoe, Asare, Donkor and Appiagyei, UGBS 13

 Accounting Concepts

Business Entity Concept Money Measurement Concept

A business is distinct Financial accounting

and separate from should record only
its owners. transactions which
Capital provided by can be measured in
monetary terms.
the owner is Money does not have
reckoned as liability a constant value
of the firm. through time.

Bekoe, Asare, Donkor and Appiagyei, UGBS 14

 Accounting Concepts
Prudence (Conservatism) Concept
Where alternative
procedures, or alternative
valuations, are possible,
the one selected should
be the one which gives
the most cautious
presentation of the
business’s financial
position or results.
Do not anticipate for
profit but to make
provision for all possible
losses.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Historical Cost Concept
Assets and expenses
should be shown at
acquisition cost and
not current market
value (i.e. their actual
cost to the business)
Objectivity and
Verifiability.
15
 Accounting Concepts

Consistency Concept Periodicity (Time Interval) Concept

Financial statements
It requires that there is should be prepared
consistency of and produced at
accounting treatment of
like terms within each regular intervals.
accounting period and An entity’s life is
from one period to the divided into time
next. periods.
Similar items should be Ensure effective
accorded similar internal decision
accounting treatments making.

Bekoe, Asare, Donkor and Appiagyei, UGBS 16

 Accounting Concepts
Materiality Concept
Only material items
are recorded and
presented on financial
statements.
Requires full
disclosure of all
important /
significant / material
information or events
Bekoe, Asare, Donkor and Appiagyei, UGBS
Substance Over Form Concept
The economic
substance of a
transaction should be
reflected in the
accounts , rather than
simply the legal form
Under pins accounting
for leasing, hire
purchase etc.
17
 Accounting Concepts

Duality Concept

Every transaction has

two effects or
aspects.
The basis of the
double entry system
of book keeping.

Bekoe, Asare, Donkor and Appiagyei, UGBS 18

 Bases of Accounting
Revenues are recognized when cash is received and expenses are recognized when cash is paid. Revenues and expenses are recognized on an economic basis regardless of the actual cash flow.

Cash Accrual
Bases Bases

Bekoe, Asare, Donkor and Appiagyei, UGBS 19