ACCOUNTING CONCEPTS AND CONVENTIONS
Subject:
ACCOUNTING
Term:
FIRST TERM
Week:
WEEK 5
Class:
SS 1
Topic:
ACCOUNTING CONCEPTS AND CONVENTIONS
Behavioural objectives:
At the end of the lesson, the learners will be able to
- identify accounting concepts
- explain the accounting concepts
Previous lesson:
The pupils have previous knowledge of
ETHICS OF ACCOUNTING
that was taught as a topic in the previous lesson
Instructional Materials:
- Wall charts
- Pictures
- Related Online Video
- Flash Cards
Methods of Teaching:
- Class Discussion
- Group Discussion
- Asking Questions
- Explanation
- Role Modelling
- Role Delegation
Reference Materials:
- Scheme of Work
- Online Information
- Textbooks
- Workbooks
CONTENT
ACCOUNTING CONCEPTS AND CONVENTIONS
CONTENT
Meaning of Accounting Concepts
Major Accounting Concepts
Accounting Conventions
Meaning of Accounting Concepts
Accounting concepts, which is also referred to as principles and fundamental accounting postulates, are rules adopted as guides to actions in the preparation of accounting statements.
Major Accounting Concepts
The following are the major accounting concepts
- Entity concept: This concept draws a distinction between the business and the owner. This concept states that the business is a personality of its own, which can sue and be sued in its own name and not in the name of the owner.
- Going concern: This is an assumption that an organization will exist forever (at least in the force able future) except otherwise proved. This concept is the authority behind the recording of assets in the books where values of properties are extended into the future especially as concerning their benefits.
- Money concept: This states that all financial transactions must be expressed with the currency in use in that location. The currency used in recording the financial data can be translated into other currency using the convertible nature of money.: This concept believes strongly that only financially oriented transactions should be given effect.
- Historical cost concept: This states that the cost values of financial transaction should be used in recording such a transaction instead of fair current market values e.g. where Olu purchased a “Honda Car” latest series for N2million in Lagos while his friend Musa bought the same brand of Honda Car at the sum of N1.5million in Togo. It is expected that Olu should record his vehicle based on N2million and not otherwise while Musa do as N1.5 million and not otherwise. Matching
- Matching concept (Revenue vs. Expenses): This is otherwise known as accrual concept which states that the income of a period should agree with the expenditure of the same period. Consequently, the relevant cost incurred in fetching a particular income should be matched together in arriving at the actual profit or loss of the concern.
- Periodicity concept: This is also known as time interval concept which states that financial records and statements should be prepared for a period of twelve calendar months as agreed to by the users of financial statements and the accounting world in general. This concept is the follow–up to the going concern concept which states that a concern or entity will exist forever except otherwise proved. The life of a concern therefore emanates from commencement to cessation. Consequently, a company cannot wait until cessation to prepare its records and statements. The user of financial statements deems it fit to prepare statements after twelve calendar months.
- Double entry concept (Dual aspect concept): This states that in any transaction. i.e. a financial event, there must be a debit and a corresponding credit entry. The total debit side must be equal or agree with the credit side which is the reason behind the agreement of the balance sheet.
- Realization concept: This states that the income and expenditure of a concern must be objectively determined i.e. income earned by an organization should be based on the services rendered, received and receivables in line with the reality of the transaction. For instance, the income received from a contract award should be used on the cost of work incurred.
Accounting Conventions
Meaning of Accounting Conventions
Accounting convention is used in resolving conflicts arising out of the application of the concepts. Accounting convention therefore provide the way out, or better still, in resolving all identifiable conflicts and puzzles emanating from the application of concepts. The accounting conventions are as follows:
Major Accounting Conventions
1. Consistency
This convention simply states that accountants and financial practitioners’ are free to choose from alternative policies and such a policy so taken must be strictly followed without deviations. This, by implication, portrays accountants as reliable, dependable, trustworthy and forthright in their professions. The job of an accountant demands transparency as a basis of building trust.
2. Prudency
This convention is also known as conservatism which states that accountants and book keepers should not anticipate future profit but future loss. This convention portrays the accountant as a person that is pessimistic and not optimistic.
3. Materiality
The term materiality is relative. i.e. What is material to one person is immaterial to the other. The essence of materiality is to assess the significance of an item in relation to the whole and such item will be treated based on its size or monetary significance.
Example: An item of revenue of ₦4,000,000 in an account of a company with a turnover of ₦15million can be considered material and hence require special attention. While the same ₦4,000,000 in the account of a company with a turnover of N900million may not be considered as material.
4. Objectivity
This states that financial records should be prepared in line with verifiable evidence i.e. Whatever is considered as income or expenditure should be supported with documentary evidence and facts.
EVALUATION
What is the difference between concept and convention in accounting?
A. Concept refers to the economic reality of the transactions while convention is the generally accepted accounting practices.
B. Convention refers to the economic reality of the transactions while concept is the generally accepted accounting practices.
C. There is no difference between concept and convention in accounting.
D. Concept is used in financial accounting while convention is used in management accounting.
The correct answer is A. Concept refers to the economic reality of the transactions while convention is the generally accepted accounting practices.
Mention four accounting concepts and explain two of them.
Evaluation
1. What is the main accounting concept that requires businesses to record transactions and events in a way that reflects their economic substance?
a. The accrual basis of accounting
b. The going concern assumption
c. The matching principle
d. The materiality concept
2. Which of the following is an example of a convention in accounting?
a. The use of accruals
b. The use of double-entry bookkeeping
c. The use of the dollar as the unit of measurement
d. The use of historical cost principle
3. Which of the following is not an objective of financial reporting?
a. To provide information that is useful to present and potential equity investors and creditors in making investment and lending decisions
b. To provide information that is useful to present and potential employees in making decisions about their employment
c. To provide information about an entity that is capable of making a difference in users’ economic decisions
d. To ensure that the financial statements fairly represent the entity’s financial position, results of operations, and cash flows
4. For which of the following types of users would accounting information be relevant?
a. Suppliers
b. Government agencies
c. Labor unions
d. All of the above
5. Which of the following is not a generally accepted accounting principle (GAAP)?
a. The going concern assumption
b. The accrual basis of accounting
c. The historical cost principle
d. The full disclosure principle
6. Which of the following is an objective of financial reporting?
a. To provide information about an entity that is useful to present and potential equity investors and creditors in making investment and lending decisions
b. To provide information about an entity that is useful to present and potential employees in making decisions about their employment
c. To provide information about an entity that is capable of making a difference in users’ economic decisions
d. All of the above
7. Which of the following is not a limitation of financial statements?
a. They do not provide all the information that users might find relevant and useful in making decisions
b. They often omit certain types of transactions and events
c. They are prepared using estimates and assumptions
d. They are subject to audit risk
8. For which of the following types of users would accounting information be relevant?
a. Government agencies
b. Creditors
c. Regulatory bodies
d. All of the above
9. Which of the following is not a generally accepted accounting principle (GAAP)?
a. The historical cost principle
b. The entity concept
c. The going concern assumption
d. The full disclosure principle
10. What is the main accounting concept that requires businesses to record transactions and events in a way that reflects their economic substance?
a. The accrual basis of accounting
b. The going concern assumption
c. The matching principle
d. The materiality concept
Marking Guide
1. The main accounting concept that requires businesses to record transactions and events in a way that reflects their economic substance is the accrual basis of accounting.
2. An example of a convention in accounting is the use of double-entry bookkeeping
3. An objective of financial reporting is to provide information about an entity that is useful to present and potential equity investors and creditors in making investment and lending decisions.
4. Accounting information is relevant for users such as suppliers, government agencies, and labor unions.
5. A generally accepted accounting principle (GAAP) is the full disclosure principle
6. Financial statements are prepared using estimates and assumptions which can be seen as a limitation.
7. Another objective of financial reporting is to provide information about an entity that is capable of making a difference in users’ economic decisions
8. Relevant accounting information can be used by government agencies, creditors, and regulatory bodies
9. The historical cost principle is a GAAP that requires businesses to record transactions and events at their historical cost.
10. The going concern assumption is another GAAP which requires businesses to continue operating for the foreseeable future. This concept is important in financial reporting because it allows users to make decisions about investing in or lending to a business.
Conclusion
The subject teacher wraps up or concludes the lesson by giving out short notes to summarize the topic that he or she has just taught.
The class teacher also goes round to make sure that the notes are well copied or well written by the pupils.
He or she makes the necessary corrections when and where the needs arise.
