Financial statements are prepared according to agreed upon guidelines. In order to understand these guidelines, it helps to understand the objectives of financial reporting. The objectives of financial reporting, as discussed in the Financial Accounting standards Board (FASB) Statement of Financial Accounting Concepts No. 1, are to provide information that
In order to prepare the financial statements, it is important to adhere to certain fundamental
accounting concepts. Going Concern, unless there is evidence to the country, it is assumed that
a business will continue to trade normally for the foreseeable future.
Accruals and Matching, revenue earned must be matched against expenditure when it was incurred
Prudence, if there are two acceptable accounting procedures choose the one gives the less
optimistic view of profitability and asset values. Consistency, similar items should be accorded
similar accounting treatments. Entity, a business is an entity distinct from its owners. Money
Measurement, accounts only deal with items to which monetary values can be attributed.
Helps existing and potential investors and creditors and other users to assess the
amounts, timing, and uncertainty of prospective net cash inflows to the enterprise.
Separate Valuation each asset or liability must be valued separately.
Materiality, only
items material in amount or in their nature will affect the true and fair view given by a set of
accounts. Historical Cost, tTransactions are recorded at the cost when they
occurred. Realization, revenue and profits are recognized when realized. Duality, every
transaction has two effects.
