Introduction to Fundamental

Accounting Concepts
Introduction to Fundamental
Accounting Concepts
Welcome to the Session

Good Afternoon everybody!! Welcome to our next topic for this week.
We will discuss the universal relevance of accounting concepts
and how it affects the accounting landscape.
Objectives of the Session

To introduce the fundamental accounting concepts that underpin all

accounting and financial reporting

To understand how these concepts apply to real-world financial

decision-making

To lay the groundwork for deeper exploration of accounting

practices and standards
Brief Overview

Fundamental accounting concepts are the bedrock of financial accounting and

reporting

These concepts ensure that financial statements are prepared accurately,

consistently, and in a manner that facilitates informed decision-making

A solid grasp of these concepts is essential for anyone involved in the financial
aspects of a business, from accounting professionals to business owners and
investors
 • Accounting concepts serve as guidelines for recording,
summarizing, and reporting financial transactions
• These concepts provide a standardized approach, ensuring
that financial information is presented in a consistent and
understandable format
The Role of • Importance for Consistency
Accounting • Consistency in financial reporting allows for the
comparison of financial information across different
Concepts periods and entities
• It ensures that changes in financial performance and
position are reflective of actual business events, not
changes in accounting methods or assumptions
• Comparability enables stakeholders to analyze and
benchmark financial information against other entities,
enhancing competitive analysis and investment decisions
 • Adherence to fundamental accounting concepts ensures
that financial statements can be compared meaningfully
across industries and borders
The Role of • Transparency in financial reporting builds trust among
investors, creditors, and other stakeholders
Accounting • It involves the full disclosure of financial information,
Concepts including the accounting policies and estimates used in
preparing financial statements
• That transparency, supported by fundamental accounting
concepts, is crucial for risk assessment, corporate
governance, and the efficient allocation of resources in the
economy
Accrual Basis of Accounting

Definition: Recording revenues and expenses when they are earned

or incurred, not when cash is exchanged

Example: A company performs a service in December but receives

payment in January; the revenue is recognized in December

Importance: Provides a more accurate picture of financial

performance and position
Going Concern Principle

Definition: The assumption that an entity will continue to operate

for the foreseeable future

Implication: Justifies the deferral of some expenses and the non-

liquidation valuation of assets

Example: Not writing off long-term assets because the business is

expected to use them
Conservatism Principle

Definition: A principle of caution where potential expenses and liabilities

are recognized promptly, but revenues only when they are ensured

Example: Creating an allowance for doubtful accounts on expected credit

losses

Importance: Protects against over-optimism in financial statements

Consistency Principle

Definition: Once an accounting method is adopted, it

should be used consistently throughout

Example: Consistently using FIFO method for inventory

valuation

Importance: Ensures comparability of financial

information over time
Historical Cost Principle

Definition: Assets and liabilities are recorded at their original

purchase cost

Example: A piece of land purchased at $100,000 is always reported

at $100,000, regardless of its current market value

Importance: Provides objectivity and reliability to financial

statements
Materiality Principle

Definition: Financial reports should include all information that

could influence decisions of informed users

Example: Omitting a $50 office expense in a company with $5

million in sales

Importance: Balances the need for detailed information with the

cost of providing it
Prudence Concept

Definition: Exercising caution when making estimates under

conditions of uncertainty

Example: Estimating warranty expenses for future repairs

Importance: Prevents overstatement of financial strength

Entity Concept

Definition: The business is treated as separate from its owners or

other businesses

Example: Personal expenses of the owner are not recorded in the

business's financial records

Importance: Ensures clarity and accuracy in financial reporting

Monetary Unit Assumption

Definition: Financial transactions are recorded in a stable currency

Example: S.I companies report in SBD dollars

Importance: Simplifies accounting by providing a common

measurement
Matching Principle

Definition: Expenses are matched with the revenues they help to

generate

Example: Depreciation of equipment over its useful life as it

generates revenue

Importance: Ensures accurate reporting of profitability

Full Disclosure Principle

Definition: All relevant financial information is reported

Example: Disclosing potential liabilities in the notes to financial

statements

Importance: Ensures users have a complete picture of financial

health
Relevance of
Accounting • Discussion on how these concepts apply in current
accounting practices
Concepts • Importance for stakeholders in making informed decisions
Application in Financial Reporting

How these concepts influence Example: The impact of the

the preparation of balance accrual basis and matching
sheets, income statements, principle on income
and cash flow statements statement reporting
 Challenges in applying
Considerations for
these concepts, such
Challenges and as estimating
international
accounting standards
Considerations allowances for
and variations
doubtful accounts
Case Study: Applying Accounting
Concepts

A real-world scenario Discussion on

illustrating the decision-making and
application of several financial statement
accounting concepts preparation
Scenario: Island Crafts' Financial Year

• Application: Island Crafts recognizes $5,000 in revenue in March, not April

when the cash for online sales is received
2. Matching Principle

• Application: Even if the payment for these expenses is made in April, the
$2,000 expense is recorded in March's financial statements
• Example: Besides the earlier examples, if Island Crafts receives a utility bill for
$300 in March that isn't paid until April, the expense is recorded in March
• Application: The trial balance might list all account balances, including sales
revenue of $5,000, cost of goods sold of $2,000, utility expense of $300, and
cash receipts and payments
Recent Trends and Developments

HOW MODERN DEVELOPMENTS LIKE DIGITAL THE ROLE OF TECHNOLOGY IN ENHANCING

CURRENCIES AND INFLATION IMPACT THE ACCOUNTING PRACTICES AND ADHERENCE TO
APPLICATION OF THESE CONCEPTS THESE CONCEPTS
1. Revenue • Example: If Island Crafts sells
Recognitio goods worth $1,000 in Bitcoin,
and the value of Bitcoin drops
n with before the transaction is
converted to the local currency,
Digital the final revenue recognized could
be less than $1
Currencies
 2.
• Example: If Island Crafts pays a
Matching supplier $500 in Bitcoin for
materials, and the value of Bitcoin
Principle rises after the payment, the actual
cost might be considered higher
and Digital or lower in retrospect
Currencies
Inflation and
Accounting Concepts
 • Example: If Island Crafts sells goods on credit
3. Accrual terms during a period of high inflation, the
money received in the future will have less
Basis of purchasing power than at the time of the
sale
Accounting and
Inflation
4. Trial
Balance • Example: While the trial balance
shows that Island Crafts' books are

and balanced, it does not reflect the

decreased purchasing power of
cash balances or the increased

Inflatio cost of replacing inventory

n
 The advent of digital currencies introduces volatility
and valuation challenges in revenue recognition and
expense matching, requiring businesses to adopt clear
policies for transactions in digital currencies

Conclusio Inflation, on the other hand, affects the real value of

financial transactions over time, necessitating
adjustments in financial reporting to reflect the true
n economic effects on the business

For Island Crafts, navigating these modern

developments means adapting traditional accounting
principles to maintain accurate, fair, and relevant
financial information in a rapidly changing economic
environment
Summary and Recap

Key takeaways from the presentation

Recap of the importance of understanding and applying

fundamental accounting concepts
Q&A and
Further Open the floor for
questions

Resources