Generally Accepted Accounting Principles and Financial Statements Essay

Submitted By NeelamKauser1
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Pages: 11

IASB Framework for the preparation and presentation of financial statements
IAS1 Presentation of financial statements (Preparation of Financial Statements for Limited Companies)

Underlying Accounting Concepts
General accounting rules that have been applied since Financial Statements first produced for external use
Not enforced through legislation / accounting standards * Accounting equation - Assets = Capital (or Equity) + Liabilities * Business Entity (Separate Accounting Entity) - For accounting purposes, transactions of the business are treated as being separate / distinct from those of its owner(s) * Money Measurement – Financial statements are concerned only with those items that can be measured in monetary units, Any item that can’t be given a monetary value is excluded from the accounting records. * Historic cost convention - Items are usually stated at their historic (or original) cost (ie: the cost that the business originally paid / received). Exceptions include: Revaluation of land and buildings, Inventory (Stock) valued at lower of cost or NRV * Duality - Every transaction will have a dual aspect (ie: comprise both a debit and a credit). In this way the accounting equation will always balance. For example if a company buys a new car for £15,000 and funds this through a bank loan: Assets (motor vehicles) increase by £15,000 and Liabilities (loan) increase by £15,000.
Fundamental Accounting Concepts/ assumptions
In addition to the underlying accounting concepts there are Fundamental accounting concepts. These are also general rules about how certain transactions should be recorded. However they are enforced through IAS 1 (Revised) Presentation of financial statements.
IAS 1 outlines certain assumptions (or rules) ‘general features’ that underpin the preparation and presentation of financial statements: * Going concern – Assumes that unless stated otherwise, the financial statements are prepared on the assumption that the business will continue in operation for the foreseeable future (at least the next 12 months). i.e. No plans to liquidate or scale down business * Accruals basis of accounting - Revenue earned in an accounting period should be matched against the expenses incurred in generating it. This is regardless of whether all cash has yet been paid / received: Revenue – Expenses = Profit * Financial statements are generally prepared on the accrual basis and on the going concern basis. The IASB Framework describes these bases as "underlying assumptions". Under the accrual basis, it is assumed that transactions are recognised when they occur (which is not necessarily when cash is received or paid) and are reported in the financial statements of the periods to which they relate.

Financial statements are generally prepared on the accrual basis and on the going concern basis. The IASB Framework describes these bases as "underlying assumptions". Under the accrual basis, it is assumed that transactions are recognised when they occur (which is not necessarily when cash is received or paid) and are reported in the financial statements of the periods to which they relate.

Under the going concern basis, it is assumed that the entity will continue in operation for the foreseeable future and has neither the intention nor the need to close down or to reduce materially the scale of its operations. If this is not the case, the financial statements will have to be prepared on a different basis and that basis must be disclosed.

* Consistency of presentation - When a business has decided on the accounting treatment of a particular item, similar items that arise in the future will be treated in the same way. This allows meaningful comparison of financial statements from one year to the next
The need for consistency is overridden only if it apparent that a change in presentation or classification would be appropriate, or if such a change is required by an international…