Name

NIM
No
Subject

: I Gede Hadika Kresna Wirawan

: 1406305074
: 09
: Accounting Theories, individual task.
Conceptual Framework for Financial Reporting

1. Going Concern Assumption

The going concern principle, also known as continuing concern
concept or continuity assumption, means that a business entity will continue to
operate indefinitely, or at least for another twelve months. Financial statements are
prepared with the assumption that the entity will continue to exist in the future, unless
otherwise stated. The going concern assumption is the reason assets are generally
presented in the balance sheet at cost rather that at fair market value. Long-term assets
are included in the books until they are fully utilized and retired.
2. Accrual Basis of Accounting
The accrual method of accounting means that "revenue or income is
recognized when earned regardless of when received and expenses are recognized
when incurred regardless of when paid". Hence, income is not the same as cash
collections and expense is different from cash payments. Under accrual basis,
revenues and expenses are recognized when they occur regardless of when the
amounts are received or paid.
For example, ABC Company rendered repair services to a client on December
9, 2014. The client paid after 30 days January 8, 2015. When should the income be
recognized? On the date it is considered earned (when the service has been
rendered). Hence, the income should be recognized on December 9, 2014 even if it
has not yet been collected as of that date. Another example, suppose ABC Company
received its electricity bill for March on April 5, 2014 and paid it on April 10. When
should the electricity expense be recorded? Correct! March. Why? Because, the
electricity expense was for the month of March even if the bill has been received and
paid in April. In other words, the "electricity" was used/consumed in March.
3. Accounting Entity Concept
The accounting entity concept recognizes a specific business enterprise as one
accounting entity, separate and distinct from the owners, managers, and employees of
that business. In other words, it means that a company has its own identity set apart
from its owners or anyone else. Personal transactions of the owners, managers, and
employees must not be mixed with transactions of the company.
For example, if ABC Company buys a vehicle to be used as delivery
equipment, then it is considered a transaction of the business entity. However, if Mr.
A, owner of ABC Company, buys a car for personal use using his own money, that
transaction is not recorded in the company's accounting system because it clearly is
not a transaction of the company.
4. Time Period (Periodicity)
The time period assumption, also known as periodicity assumption, means that
the indefinite life of an enterprise is subdivided into time periods (accounting periods)

which are usually of equal length for the purpose of preparing financial reports on
financial position, performance and cash flows. An accounting period is usually a 12month period either calendar or fiscal. A calendar year refers to a 12-month period
ending December 31. A fiscal year is a 12-month period ending in any day throughout
the year, for example, April 1 to March 31 of the following year. The need for timely
reports has led to the preparation of more frequent reports, such
asmonthly or quarterly statements.
5. Monetary Unit Assumption
The monetary unit assumption has two characteristics quantifiability and
stability of the currency. Quantifiability means that records should be stated in terms
of money, usually in the currency of the country where the financial statements are
prepared. Stability of the dollar (or euro, pound, peso, etc.), a.k.a. stable dollar
concept means that the purchasing power of the said currency is stable or constant and
that any insignificant effect of inflation is ignored. It is to be noted however that
financial statements of a company reporting in the currency of a hyperinflationary
economy (an economy with very high inflation rate) must be restated, in accordance
with applicable accounting standards.
6. Other Principles Derived from the Above Concepts
Some of the other principles followed in accounting include:
a. Matching Principle The matching concept means that expenses are
recognized in the period the related income is earned, and income is
recognized in the period the related expenses are incurred. In essence, income
is matched with expenses and vice versa.
Through the accrual basis of accounting, better matching of income and
expenses is achieved.
b. Revenue Recognition Principle In accrual basis accounting, revenue or
income is recognized when earned regardless of when received. It means that
income is recorded when the service is fully performed or when sale occurs,
even if the amount is not yet collected.
c. Expense Recognition Principle Also under accrual basis accounting,
expenses are recognized when incurred regardless of when they are paid. In
other words, expenses are recorded when used (incurred), even if they are not
yet paid.
d. Historical Cost Principle Items in the balance sheet are generally presented
at historical cost. Nonetheless, some accounts are measured using other bases
such as fair market value, current cost, and discounted amount. You will learn
more about them in intermediate accounting studies.

7. Objective Evidence Concept

According to the Objective Evidence concept, every financial entry should be
supported by some objective evidence. Purchase should be supported by purchase
bills, sale with sale bills, cash payment of expenditure with cash memos, and

payment to creditors with cash receipts and bank statements. Similarly, stock should
be checked by physical verification and the value of it should be verified with
purchase bills. In the absence of these, the accounting result will not be trustworthy,
chances of manipulation in accounting records will be high, and no one will be able
to rely on such financial statements.
8. Dual Aspect Concept
There must be a double entry to complete any financial transaction, means
debit should be always equal to credit. Hence, every financial transaction has its dual
aspect:
a. we get some benefit, and
b. we pay some benefit.
For example, if we buy some stock, then it will have two effects:
a. the value of stock will increase (get benefit for the same amount), and
b. it will increase our liability in the form of creditors.
Transaction

Effect

Stock will increase by Rs 25,000 (Increase in debit

balance)

Purchase of Stock for Rs 25,000

Cash will decrease by Rs 25,000 (Decrease in debit

balance)
or
Creditor will increase by Rs 25,000 (Increase in credit
balance)

9. Materiality
Because of this basic accounting principle or guideline, an accountant might
be allowed to violate another accounting principle if an amount is insignificant.
Professional judgement is needed to decide whether an amount is insignificant or
immaterial.
An example of an obviously immaterial item is the purchase of a $150 printer
by a highly profitable multi-million dollar company. Because the printer will be used
for five years, the matching principle directs the accountant to expense the cost over
the five-year period. The materiality guideline allows this company to violate the
matching principle and to expense the entire cost of $150 in the year it is purchased.
The justification is that no one would consider it misleading if $150 is expensed in the
first year instead of $30 being expensed in each of the five years that it is used.

Because of materiality, financial statements usually show amounts rounded to the

nearest dollar, to the nearest thousand, or to the nearest million dollars depending on
the size of the company.
10. Conservatism
If a situation arises where there are two acceptable alternatives for reporting an
item, conservatism directs the accountant to choose the alternative that will result in
less net income and/or less asset amount. Conservatism helps the accountant to "break
a tie." It does not direct accountants to be conservative. Accountants are expected to
be unbiased and objective. The basic accounting principle of conservatism leads
accountants to anticipate or disclose losses, but it does not allow a similar action for
gains. For example, potential losses from lawsuits will be reported on the financial
statements or in the notes, but potential gains will not be reported. Also, an accountant
may write inventory downto an amount that is lower than the original cost, but will
not write inventory up to an amount higher than the original cost.
11. Full Disclosure Principle
If certain information is important to an investor or lender using the financial
statements, that information should be disclosed within the statement or in the notes to
the statement. It is because of this basic accounting principle that numerous pages of
"footnotes" are often attached to financial statements.
As an example, let's say a company is named in a lawsuit that demands a
significant amount of money. When the financial statements are prepared it is not
clear whether the company will be able to defend itself or whether it might lose the
lawsuit. As a result of these conditions and because of the full disclosure principle the
lawsuit will be described in the notes to the financial statements.
12. Reliable, Verifiable, and Objective
In addition to the basic accounting principles and guidelines listed in Part 1,
accounting information should be reliable, verifiable, and objective. For example,
showing land at its original cost of $10,000 (when it was purchased 50 years ago) is
considered to be more reliable, verifiable, and objective than showing it at its current
market value of $250,000. Eight different accountants will wholly agree that the
original cost of the land was $10,000they can read the offer and acceptance for
$10,000, see a transfer tax based on $10,000, and review documents that confirm the
cost was $10,000. If you ask the same eight accountants to give you the
land's current value, you will likely receive eight different estimates. Because the
current value amount is less reliable, less verifiable, and less objective than the
original cost, the original cost is used. The accounting profession has been willing to
move away from the cost principle if there are reliable, verifiable, and objective
amounts involved. For example, if a company has an investment in stock that is
actively traded on a stock exchange, the company may be required to show the current
value of the stock instead of its original cost.
13. Consistency
Accountants are expected to be consistent when applying accounting
principles, procedures, and practices. For example, if a company has a history of
using the FIFO cost flow assumption, readers of the company's most current financial
statements have every reason to expect that the company is continuing to use the

FIFO cost flow assumption. If the company changes this practice and begins using
the LIFO cost flow assumption, that change must be clearly disclosed.
14. Comparability
Investors, lenders, and other users of financial statements expect that financial
statements of one company can be compared to the financial statements of another
company in the same industry.Generally accepted accounting principles may provide
for comparability between the financial statements of different companies. For
example, the FASB requires that expenses related to research and development
(R&D) be expensed when incurred. Prior to its rule, some companies expensed R&D
when incurred while other companies deferred R&D to the balance sheet and
expensed them at a later date.

Sources
http://www.accountingverse.com/accounting-basics/basic-accounting-principles.html
https://www.tutorialspoint.com/accounting_basics/accounting_basic_concepts.htm
http://www.accountingcoach.com/accounting-principles/explanation/2