Consistency Theory: Accounting Principles And Principles Of Accounting

For example, the business entity means that commercial expenses are kept separate from personal expenses and the monetary unit is generally the U.S. dollar. Next, there are four basic principles that cover historic costs, revenue recognition, matching and full disclosure. For instance, the historical cost principle mandates that companies report their asset and liability acquisition costs instead of reporting the fair market value. On the other hand, the revenue recognition principle states that companies must only record earned revenue, not received revenue. This forms the basis of accrual basis accounting. Finally, there are four basic constraints, which include objectivity, materiality, consistency and conservatism. To illustrate, the objectivity principle mandates that financial statements produced by the company’s accountants must be based on factual evidence. Conversely, the consistency principle means that the company must use the same accounting methodology for every accounting period. Overall, the GAAP provides structured consistency and transparency to all aspects of accounting and financial

Financial statements are used to determine the business activities of a firm and the role of accounting analysis is to determine the accuracy and quality of the information provided. This analysis would look into the degree of its accounting figures captures its business reality through the policies used and its resulting noise, potential forecast errors and its impact on Myer’s profit.

9. Discuss the concept of electing § 179 expense. Does the election allow a larger expense deduction in the year of asset acquisition?

Consistency. When the company chooses the accounting method, it should continue using it throughout. It should be the same from period to period and year to year. If the company chooses to change the method, it should be disclosed and explained why the company made such a change. This concept can also be described as logical coherence among parts or things, when the same sequence is followed from one period to another.

When talking about accounting, the first thing we should know is the history of its development. Traditionally, the development is from inductive to deductive. Inductive theory assume what is done by the majority is the most appropriate practice. However, It did not seek to evaluate the logic or merit of

The financial statements need to meet two qualitative characteristics, namely, relevance and reliability. The statements must be relevant to the decision making process of the users and make an impact on the economic decisions by making comparison with the past, present or future occurrences. For the information to be useful, it must be reliable too. This means the statements should be free from material errors and also contain all the necessary explanations and

There are two basic principles related to accounting for income taxes, each of which considers uncertainty through the application of recognition and

One purpose of making financial statements by managements is to reflect company’s operation and financial situations, which can provide benefit information for decision making level. Another aspects is creditors and investors seek to better investment decision after they analyze financial statements. Therefore, it is very important to management level, creditors and investors through evaluating corporation’s financial status objectively. And we can analyze through three parts, which is operation activities, investing activities and financial

Assets, liabilities, equity, revenue, and expenses has their own balance. A company will produce a trial balance which will give the balance of all these in a certain amount of time such as monthly, quarterly, or annually. The trial balance ensures that account balance is accurate. If the accounting equation isn’t balanced out then there is an error in the accounting records.

This hierarchy plays a major role in the effectiveness of accounting information. It is important to use the qualities of accounting information to assess which is best suited for various circumstances. Determining which alternatives provides the most useful information for decision-making purposes, will help decide accounting methods, amounts, types of disclosures, and formats. FASB assists accountants by identifying the qualitative characteristics of accounting information that distinguish relevancy of accounting information for decision-making purposes. Restraints, are also, a part of the framework consisting mostly of cost-benefit and materiality. A simple comprehension remembrance is that the qualitative information has three levels. The first level deals with the objective

The Financial Statements are generally prepared for the measurement of financial position of a particular company for a particular period of time. Financial statement analysis is structural and logical way to present overall financial performance of an organization. It’s also helps in evaluating and analyzing the liquidity and profitability position of the business which can be used for decision making for business

To start, we must take note of the fact that there has never been a purely rules based or a purely principles based system in existence. Every accounting standard will exist somewhere along a spectrum between rules and principles. The goal must be to seek the “sweet spot” on that spectrum. (PWC, 2008)

According to the conceptual frameworks used by both the Financial Accounting Standards Board and the International Financial Standards Board, one of the main reasons why companies prepare financial reports is to allow users of financial statements make decisions regarding the provision of resources to the firm (Financial Accounting Standards Board, 2010; International Financial Standards Board, 2010). These decisions relate to the buy, sell, or hold moves that investors make based on the information received from the company. Both conceptual frameworks also include credit investors as being interested in the company’s performance as reflected in the financial reports. Apart from proving information to investors on the company’s projected cash flows, financial statements also play the important role in enhancing stewardship responsibilities that rest with managers. These requirements have connotations of financial statements being relevant to the targeted audience. In addition, financial statements are expected to be reliable from the audience’s viewpoint.

In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and governments. The term is usually confined to the United States; hence it is commonly abbreviated as US GAAP or simply GAAP. However, in the theoretical sense, Generally Accepted Accounting Principles encompass the entire industry of accounting, and not only the United States. Outside the academic context, GAAP means US GAAP.

The principles are the result from the accounting practice that has been used and improved over the time. The deeper explanation about the statement is that, accounting standard such as IFRS is created based on the previous accounting practice itself rather the theories. The theories are useful in guiding the other field like finance and economics. There is also evidence that the accounting theory exists after standard has been practiced (Cluskey, Ehlen and Rivers 2007). The father of accounting, Luca Pacioli explained about double-entry booking in one of his studies. The study described the practice and explained to the readers the logic behind it. The research had given birth to dozens of studies made by theorist to further discuss about the accounting practice. By this evidence, the readers can also conclude that not only the standard that exist from accounting practice but in fact, accounting theory also exist to explain the nature of the practice. Back to the purpose of this paper, accounting theory plays no role in the setting of accounting standard is approved by two points: the process of setting accounting standard itself is a political activity and the development of accounting standard is influence by the existing accounting practice not accounting