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Lecture Accounting for business: A guide for non-accountants (2/e) – Chapter 4: Limitations of accounting reports

After you have mastered the material in this chapter, you will be able to: Explain the term ‘generally accepted accounting principles’; explain the effects of the following accounting principles on the measurement of assets, revenues and expenses: historical cost, monetary unit, going concern, accounting period, conservatism. | Chapter 4 Limitations of accounting reports 4 - Objectives Explain the term ‘generally accepted accounting principles’. Explain the effects of the following accounting principles on the measurement of assets, revenues and expenses: historical cost monetary unit going concern accounting period conservatism. 4 - Accounting principles and GAAPs The term ‘generally accepted accounting principles’ (GAAPs) is used to refer to all accounting conventions and concepts. 4 - Accounting principles and GAAPs (continued) GAAPs: are not legally binding the key premise of accounting implementation the foundation of the preparation of financial reports attain to get consensus on the application of key accounting issues. 4 - Historical cost Assets to be reported in the Statement of Financial Position are shown at the price for that asset. All transactions are recorded and reported at the original cost. Historical cost recording allows transactions to be verified. 4 - Monetary unit Transactions of a business are recorded in the monetary unit of the country in which it is operating. All items are recorded in a common base. The monetary units allows comparisons to be made between items and between periods. The monetary unit provides a common measuring stick. 4 - Going concern convention Assumes the business will continue to operate in the future. The financial records are prepared on the assumption the business will be ongoing. There is linkage between the going concern convention and the historical cost convention. 4 - Accounting period Transactions can be divided into significant accounting periods. Legislation states that statements need to be recorded yearly, ending 30 June XXXX. However, a business can report more frequently if desired. 4 - Conservatism Accountants adopt a pessimistic approach in measuring revenues and expenses rather than an optimistic approach. This approach avoids the over-estimation of an item. 4 | Chapter 4 Limitations of accounting reports 4 - Objectives Explain the term ‘generally accepted accounting principles’. Explain the effects of the following accounting principles on the measurement of assets, revenues and expenses: historical cost monetary unit going concern accounting period conservatism. 4 - Accounting principles and GAAPs The term ‘generally accepted accounting principles’ (GAAPs) is used to refer to all accounting conventions and concepts. 4 - Accounting principles and GAAPs (continued) GAAPs: are not legally binding the key premise of accounting implementation the foundation of the preparation of financial reports attain to get consensus on the application of key accounting issues. 4 - Historical cost Assets to be reported in the Statement of Financial Position are shown at the price for that asset. All transactions are recorded and reported at the original cost. Historical cost recording allows transactions to be verified. 4 - Monetary unit