Professional Documents
Culture Documents
Lecuture-01 (05.01.2010)
What is Accounting?
An information systems that identify, record and presenting business transactions and
communicating it to the interested parties (internal and external users).
Assets Liabilities
Revenues Expenses
Concepts in Accounting.
Two basic concepts of accounting-
Materiality concept: The materiality concept proposes paying attention to important
events and ignoring insignificant accounting items. For example, 10 ball pens purched for a
large bank, the depreciation of such pen having an insignificant impact on the firm’s net
profit and loss, rather than its recording cost. So it should have to omit.
Conservatism concept:
Accountants are conservative in recording transactions. This principle has probably
contributed most to the stereotypical image of the professional accountant. They always tend
to take the pessimistic view in recording transactions because they are obligated to protect the
reader of financial statements from concluding that the financial status of a company is
brighter than it really is.
For example, in case of LIFO and FIFO, which minimize the maximum amount of risk,
inventory should be evaluated in this method.
Relevance:
To make a difference in the decision process, information must possess predictive value
and/or feedback value. This implies that, to be useful, accounting information must assist a
user to form, confirm or maybe revise a view - usually in the context of making a decision
(e.g. should I invest, should I lend money to this business? Should I work for this business?)
1. Timeliness- Information is timely when it is available to users early enough to allow
its use in the decision process.
2. Predictive Value-Confirmation of investor’s expectations about future cash
generating ability.
Reliability:
Reliability is the extent to which information is verifiable, representationally faithful, and
neutral. This implies that the accounting information that is presented is truthful, accurate,
complete (nothing significant missed out) and capable of being verified (e.g. by a potential
investor).
Comparability:
This implies the ability for users to be able to compare similar companies in the same
industry group and to make comparisons of performance over time. Much of the work that
goes into setting accounting standards is based around the need for comparability.
Consistancy:
This implies consistent treatment of similar items and application of accounting policies.