Accounting Principles and Concepts: A Comprehensive Guide
Equity
Fairness
The fairness between competing interests must be a constant concern in accounting. Users of financial data may find that their interests are in conflict. Therefore, financial statements should be prepared to fairly reflect the various interests at stake in a farm or business.
Body
Entity Concept
Financial statements always refer to an entity where the owner is considered a third party. The concept of “entity” is different from “person” as one person can produce financial statements for several “entities” of their property.
Economic Assets
Definition
Financial statements always refer to economic goods, including material and immaterial goods that have value and are economically capable of being valued in monetary terms.
Base Currency
Financial statements reflect assets. Choosing an accounting currency and valuing assets involves applying a “price” to each unit. Generally, the legal tender in the country where the “entity” operates is used as the accounting currency. In cases where the currency is unstable, adjustments can be made to maintain the validity of the financial statements.
Existing Business (Going Concern)
Financial statements assume a “going concern” concept, meaning the economic organization’s existence and future prospects are fully considered.
Valuation at Cost
The primary valuation method, which determines the development of financial statements, is called “progress” and uses the “going concern” concept. This rule establishes “cost” as the basic concept of valuation. Fluctuations in the value of the accounting currency are not initially corrected, but adjustments can be made to reflect these changes.
Exercise
Definition
In business, it’s necessary to measure the results of management periodically for administrative, legal, tax, or financial reasons. It’s essential that these periods are of equal duration to ensure comparability between years.
Earned
Economic variations considered as economic performance are those pertaining to a specific year, regardless of whether they are received or paid.
Objectivity
Changes in assets, liabilities, and equity should be recognized formally in the financial statements as soon as they can be objectively measured and expressed in the accounting currency.
Completion
Economic results should be counted only when the operation that originates them is completed. From a legal or trade practices perspective, the term “made” is often used as part of the accrual concept.
Prudence
Definition
Prudence means that when choosing between two values for an asset, the lower one should be selected. Alternatively, a transaction should be recorded to reflect the lower ownership rate. This principle can be summarized as “account for all known losses and recognize profits only when realized.” Exaggerated application of this principle can be detrimental to the fair presentation of the financial position and results of operations.
Uniformity
Definition
The general principles and standards used to prepare financial statements for a given entity should be applied consistently from one period to another. However, the principle of uniformity shouldn’t prevent necessary changes to these principles or specific rules when the situation demands it.
Materiality (Significance or Relative Importance)
Definition
Common sense is crucial when assessing the application of general principles and specific rules. Situations may arise that don’t fit neatly into these principles but don’t distort the overall picture. The dividing line between what is and isn’t significant requires a case-by-case approach, considering factors like the relative effect on assets, liabilities, equity, or results of operations.
Exhibition
Definition
Financial statements must contain all the necessary information and details for a proper interpretation of the financial and economic performance of the entity.