Accounting principles ppt slides

accounting principles ppt presentation and basic accounting principles powerpoint presentation
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Published Date:26-07-2017
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CHAPTER 12 ACCOUNTING PRINCIPLES www.ThesisScientist.comCONCEPTUAL FRAMEWORK OF ACCOUNTING • Generally accepted accounting principles are a set of rules and practices that are recognized as a general guide for financial reporting purposes. • Generally accepted means that these principles must have substantial authoritative support. • The Canadian Institute of Chartered Accountants (CICA) is responsible for developing accounting principles in Canada. www.ThesisScientist.comCICA’S CONCEPTUAL FRAMEWORK • The conceptual framework consists of: – objective of financial reporting, – qualitative characteristics of accounting information, – elements of financial statements, and – recognition and measurement criteria (assumptions, principles, and constraints). www.ThesisScientist.comOBJECTIVE OF FINANCIAL REPORTING • The objective of financial reporting is to provide information that is useful for decision-making www.ThesisScientist.comQUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION • The accounting alternative selected should be one that generates the most useful financial information for decision making. • To be useful, information should possess the following qualitative characteristics: 1. understandability 2. relevance 3. reliability 4. comparability and consistency www.ThesisScientist.comUNDERSTANDABILITY • Information must be understandable by its users. • Users are assumed to have a reasonable comprehension of, and ability to study, the accounting, business, and economic concepts needed to understand the information. www.ThesisScientist.comRELEVANCE • Accounting information is relevant if it makes a difference in a decision. • Relevant information helps users forecast future events (predictive value), or it confirms or corrects prior expectations (feedback value). • Information must be available to decision makers before it loses its capacity to influence their decisions (timeliness). www.ThesisScientist.comRELIABILITY • Reliability of information means that the information is free of error and bias – it can be depended on. • To be reliable, accounting information must be verifiable – there must be proof that it is free of error and bias. • The information must be a faithful representation of what it purports to be – it must be factual. www.ThesisScientist.comCOMPARABILITY AND CONSISTENCY • Comparability means that the information should be comparable with accounting information about other enterprises. • Consistency means that the same accounting principles and methods should be used from year to year within a company. 2000 2001 2003 www.ThesisScientist.comRECOGNITION AND MEASUREMENT CRITERIA • Recognition and measurement criteria used by accountants to solve practical problems include assumptions, principles, and constraints. • Assumptions provide a foundation for the accounting process. • Principles indicate how economic events should be reported in the accounting process. • Constraints permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information. Principles Assumptions Constraint s Revenue recognition Going concern Cost - benefit Matching Monetary unit Materiality Full disclosure Economic entity www.ThesisScientist.com Cost Time periodGOING CONCERN ASSUMPTION The going concern assumption assumes that the enterprise will continue to operate in the foreseeable future. Implications: capital assets are recorded at cost instead of liquidation value, amortization is used, items are labeled as current or non-current. www.ThesisScientist.comMONETARY UNIT ASSUMPTION • The monetary unit assumption states that only transaction data capable of being expressed in terms of money should be included in the accounting records of the economic entity. • Also assumes unit of measure () remains sufficiently stable over time. Ignores inflationary and deflationary effects. Customer satisfaction Should not be included in Percentage of accounting records international employees Should be included Salaries paid in accounting records www.ThesisScientist.comECONOMIC ENTITY ASSUMPTION The economic entity assumption states that economic events can be identified with a particular unit of accountability. Example: Harvey’s activities can be distinguished from those of other food services such as Swiss Chalet. www.ThesisScientist.comTIME PERIOD ASSUMPTION The time period assumption states that the economic life of a business can be divided into artificial time periods. Example: months, quarters, and years 2000 2001 2003 QTR 1 JAN FEB MAR APR QTR 2 MAY JUN JUL AUG QTR 3 SEPT OCT NOV QTR 4 DEC www.ThesisScientist.comREVENUE RECOGNITION PRINCIPLE • The revenue recognition principle says that revenue should be recognized in the accounting period in which it is earned. – Production/sales essentially complete – Revenues measurable – Collection reasonably assured – Expenses determinable www.ThesisScientist.comREVENUE RECOGNITION • Revenue can be recognized: 1. At point of sale 2. During production 3. At completion of production 4. Upon collection of cash www.ThesisScientist.comPERCENTAGE-OF-COMPLETION METHOD OF REVENUE RECOGNITION • The percentage-of-completion method recognizes revenue and income on the basis of reasonable estimates of the project’s progress toward completion. • A project’s progress toward completion is measured by comparing the costs incurred in a year to total estimated costs of the entire project. www.ThesisScientist.comILLUSTRATION 12-4 FORMULA TO RECOGNIZE REVENUE IN THE PERCENTAGE- OF-COMPLETION METHOD Cost Incurred Total Estimated Percent Complete = ÷ (Current Period) Cost (Current Period) Revenue Percent Complete Total Revenue Recognized =  (Current Period) (Current Period) The costs incurred in the current period are then subtracted from the revenue recognized during the current period to arrive at the gross profit. www.ThesisScientist.comINSTALMENT METHOD OF REVENUE RECOGNITION • The cash basis is generally used only when it is difficult to determine the revenue amount at the time of a credit sale because collection is so uncertain. • The instalment method, which uses the cash basis, is a popular approach to revenue recognition. • Under the instalment method gross profit is recognized in the period in which the cash is collected. www.ThesisScientist.comILLUSTRATION 12-8 GROSS PROFIT FORMULA- INSTALMENT METHOD • Under the instalment method, each cash collection from a customer consists of 1. a partial recovery of the cost of goods sold, and 2. a partial gross profit from the sale. • The formula to recognize gross profit is shown below. Sales Gross Profit  Gross Profit = Revenue Margin Gross Profit Gross Profit Cash Collections  = Recognized Margin from Customer during the period www.ThesisScientist.com

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