accounting models and its assumptions

7/28/2019 Accounting Models and its assumptions

1/15

WHATIS ACCOUNTING?

The systematic recording,

reporting, and analysis of

financial transactions of a

business

Businesses are crucial to

accounting and mustprepare financial

statements


2/15

WHATARE ACCOUNTING

CONCEPTS?Ground rules of accounting

that should be followed in

preparation of all accounts

and financial statements

These rules must be followed

by accountants who work forany business or are

entrepreneurs in their own

firm


3/15

WHATIS HISTORICAL COST

ACCOUNTING?

The financial accounting based on the

original cost of an item ignoring

inflationary increases.

Records an asset based on its

actual value without any

adjustments for inflation

On a balance sheet the

values of assets are the

Purchase cost of the asset


4/15

WHATIS CURRENT COST

ACCOUNTING?Also known as market value

accounting

A form of accounting in

which the approach to capital

maintenance is based on

maintaining the operating

capability of a business

Mutual funds usually pricetheir shares daily based on

the last trade of the dayAssets measured according to

replacement cost

The adjustments called

market-to-market


5/15

ADVANTAGESOFCURRENT

COSTACCOUNTINGMore relevant

Provides up-to-date information with

financial market

Takes inflationary adjustments into account

Critics have argued market value (current

cost) reveals economic realities that arehidden by historical cost accounting.


6/15

CONTINUED...

Investors and creditors also prefer the market value

accounting

The information about the market value at the

reporting date, the changes in that value and thecomponents of that change- all provide the investors

with valuable information for his decision making.

In financial statements , easier to view anddetermine whether the asset or liability is at risk or

not


7/15

DISADVANTAGESOFCURRENT

COSTACCOUNTING

Unreliable

if the information is unreliable, it should not be

used to make financial decisions.

Volatile

When market price of an asset or liability is not

available, the value is estimated (inappropriate)

Cannot provide the same relevant and reliability in

case of measuring the appreciation.


8/15

MEASUREMENTOFTHEELEMENTSOF

FINANCIALSTATEMENTS

Measurement is the process of determining the

monetary amounts at which the elements of thefinancial statements are to be recognized andcarried in the balance sheet and incomestatement.


9/15

MEASUREMENTOFTHEELEMENTSOF

FINANCIALSTATEMENTSThis involves the selection of the particular

basis of measurement.

Historical cost

Current cost

Realizable (settlement) value.

Present value.

Examples :-

Inventories are usually carried at the lower ofcost and net realizable value.

Marketable securities may be carried at marketvalue.

Pension liabilities are carried at their present

value


10/15

CONCEPTS OF CAPITAL AND

CAPITAL MAINTENANCE A financial concept of capital is adopted by

most entities in preparing their financialstatements.

Under a financial concept of capital, capital issynonymous with the net assets or equity of theentity.

Financial capital maintenance can be measuredin either nominal monetary units or units ofconstant purchasing power.


11/15


CAPITAL MAINTENANCE Under a physical concept of capital, such as

operating capability, capital is regarded as theproductive capacity of the entity based on, forexample, units of output per day.

The selection of the appropriate concept ofcapital by an entity should be based on theneeds of the users of its financial statements


12/15

FINANCIALCAPITALMAINTENANCE

Financial capital maintenance

Under this concept a profit is earned only if the

financial amount of the net assets at the end ofthe period exceeds the financial amount of netassets at the beginning of the period, afterexcluding any distributions to, andcontributions from, owners during the period.


13/15

PHYSICALCAPITALMAINTENANCE

Under this concept a profit is earned only if thephysical productive capacity of the entity at theend of the period exceeds the physicalproductive capacity at the beginning of theperiod, after excluding any distributions to, andcontributions from, owners during the period.


14/15


CAPITAL MAINTENANCEThe concept of capital maintenance is

concerned with how an entity defines the capitalthat it seeks to maintain.

profit is the residual amount that remains afterexpenses (including capital maintenanceadjustments, where appropriate) have beendeducted from income. If expenses exceed

income the residual amount is a loss.


15/15

THEDIFFERENCEBETWEENTHETWO

CONCEPTS

The principal difference between the twoconcepts of capital maintenance is thetreatment of the effects of changes in the pricesof assets and liabilities of the entity.

In general terms, an entity has maintained itscapital if it has as much capital at the end of theperiod as it had at the beginning of the period.

Any amount over and above that required tomaintain the capital at the beginning of theperiod is profit.

accounting models and its assumptions

Documents