Chapter 1
Principles of accounts
This content contains the foundational principles of Accounting, covering essential concept, Technological,Ethical consideration, The mechanics of business Transaction and the preparation of basics financial statement. It is designed for learner's to grasp the Cole logic and structure of the accounting discipline.
1. Principles of Accounts
1.1 Introduction to Principles of Accounts
√ Accounting principles are a set of rules, standards, and conventions that guide the preparation and presentation of financial statements.
✓ They ensure comparability, consistency, transparency, and reliability of financial information.
✓ Purpose: To provide a common understanding and framework for financial reporting.
1.2 Users of Accounting Information
• Internal Users:
✓ Management: For decision-making, planning, controlling operations. Employees: For job security, salary negotiations.
• External Users:
✓ Investors/Shareholders: To assess the profitability and financial health for investment decisions.
✓Creditors/Lenders: To evaluate creditworthiness and ability to repay loans.
✓ Suppliers: To gauge ability to pay for goods/services.
✓Customers: To assess the long-term viability of a supplier.
✓Government/Regulators: For taxation purposes, economic policy, and legal compliance.
✓ Public: For general information about the entity's impact.
1.3 Accounting Terminologies
✓ Asset: Resources controlled by the entity from which future economic benefits are expected to flow.
✓Liability: Present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources.
✓ Equity: The residual interest in the assets of the entity after deducting all its liabilities.
✓ Revenue: Gross inflow of economic benefits arising in the course of the ordinary activities of an entity.
✓ Expense: Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrenc of liabilities that result in decreases in equity, other than those relating to distributions to owners.
✓ Debit (Dr): Entry on the left side of an account. Increases assets, expenses; decreases liabilities, equity, revenue.
✓ Credit (Cr): Entry on the right side of an account. Increases liabilities, equity, revenue; decreases assets, expenses. Transaction: An economic event that affects the financial position of an entity and can be measured in monetary terms.
1.4 Accounting Concepts
Business Entity Concept: The business is treated as a separate entity from its owners. ✓ Going Concern Concept: Assumes the business will continue to operate indefinitely in the foreseeable future. Monetary Unit Concept: Transactions are recorded in a stable currency unit.
✓ Historical Cost Concept: Assets are recorded at their original cost at the time of acquisition.
✓ Accrual Basis of Accounting: Revenue is recognized when earned, and expenses are recognized when incurred, regardless of cash receipt or payment.
✓Matching Concept: Expenses are recognized in the same period as the revenues they help to generate.
✓ Consistency Concept: Accounting methods should be applied consistently from one period to the next. Prudence/
✓ Conservatism Concept: Anticipate no profits, but provide for all possible losses.
✓ Materiality Concept: Information is material if its omission or misstatement could influence the economic decisions of users.