Generally Accepted Accounting Principles and Economic Benefit Essays

Submitted By aassddcvb
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Two underlying assumptions of financial accunting: accrual basis and going concern
1. undersetandability, 2. relevance a. materiality 3. reliability b. Faithful reperesentation c. Substan ce over form d. Free from bias e. Conservatism f. completeness 4. comparability relevant: accounting information should assist user to make, confirm or correct predictions about the outcomes of past, present or future events – it is relevant if it has potential to affect the decision making of user of the financial report. Depends on materiality (nature and magnitude) reliability : faithful reresentation, substance over form, neutrality (free from bias), conservatism (caution etimates on uncertainity) , complete its usually a trade off between relevance and reliability
example: historical cost (reliable, not really relevant) vs fair value (rekevance, not very reliable) of land price after 20 years.
Asset: controlled by entitiy, future economic benefit through use or exchange, from past transsactions/event. FEB: sell, rent, occupy, run
Recognised : in financial statement, disclosed: in the notes
Asset is recognised when it is probable and reliably meassured.
Example1: a storage warehouse purchase for cash:
Essential characteristics: has feb, can be controlled, and as a result from past transaction
Recognition criteria: probable and can be meassured reliably
Example 2: highly specialised machine
Essential characteristics: has FEB, has control and result of previous transaction
Recognition: probable and can be meassured reliably
Example 3: new artificial sweetener that company has developed but requires govt approval essential: has FEB, has control and result from past transactions recognition: can meassure cost but may or may not be probable (?) thus not recognised but disclosed
Liabliities: present obligation from past event, expected an outflow of economic benefit in the future
Recognised if: probable and can be meassured reliably
Example 1: Christmas bonus to be paid to staff when such a bonus is not part of the employment