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Chapter 3

ACCT 301 Chapter Notes - Chapter 3: Financial Statement, Accrual, Historical Cost


Department
Accounting
Course Code
ACCT 301
Professor
All
Chapter
3

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Chapter 3
The accounting concepts and conventions are based on years of practice and
judgment. But that doesn’t necessarily mean that they are fool-proof. FRS 18
recognizes this fact, and it provided us with a conceptual framework to base our
accounting standards on. In the previous paper I have explained some of the
accounting concepts which we may have to deal with day in day out, but there are only
two accounting standards that have been emphasized by FRS 18, which are Going
Concern, and the Accruals Concept.
The conceptual framework mentioned above is the theoretical basis for determining
which events should be accounted for, how they should be measured and how they
should be communicated to the user.
Yet, prior to the ASB’s release of the Statements of Principles, the lack of a conceptual
framework created some of the following problems,
1. Fundamental principles were tackled more than once in different standards, which
have caused contradictions, ambiguity and as a result, affected the true & fair
view of Financial Reporting.
2. In the USA for example, the highly detailed number of standards created a set of
rules rather than general principles.
As a result, a basis now exists for reducing the no. of alternative accounting treatments
permitted by accounting standards and company law. Furthermore, the problems
tackled or associated due to the lack of a conceptual framework are now avoided.
Although, many argue that the release of the statement of principles doesn’t
necessarily make things easier or clearer for its users, but I believe that a future
framework for the development of accounting standards now exist, and auditors may
now confirm whether financial statements are based on accountancy standards or not.
The BPP, suggests, that the end-result of the Statement of Principles is that Objectivity
now exists, which decreases the scope of manipulation. Uniformity means that there’s
less scope for disagreement between current conventions and new ones, and finally
Familiarity means that the more people use the accounts, the more they’ll get used to
them.
Through time and age, men always seemed to be in contradiction with women, and
that’s how it is with Accruals and Prudence. The puzzled look on every man’s mind
when the lady asks “Do I look fat?” is very similar to that of an accountant, when
asked “Should we report the worst possible situation, prudence? Or the most likely
position, matching?!”
On a more serious note,
1. Prudence is in a conflict with the going concern concept because it may not be
prudent to assume that the business is a going concern.
2. Furthermore, prudence makes it difficult to treat items consistently because at one
period, an item may require different treatment than it did in a previous period.
E.g. prior year adjustments.
3. The prudence concept also contradicts the objectivity concept in that it requires
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