Financial statements are prepared in accordance with established guidelines. Understanding the objectives of financial reporting is helpful in understanding these guidelines. According to the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Concepts No. 1, the goals of financial reporting are to provide information that
Certain fundamental accounting concepts must be followed when preparing financial statements. Going Concern, it is assumed that a business will continue to trade normally for the foreseeable future unless there is evidence to the contrary.
Accruals and Matching, revenue earned must be matched against expenditure incurred at the time it was earned. Prudence dictates that if two acceptable accounting procedures are available, choose the one that provides a less optimistic view of profitability and asset values.
In order to maintain consistency, similar items should be assigned similar accounting treatments. A business is a separate entity from its owners. Money Measurement, accounts only deal with items that can be assigned monetary values.
Helps existing and potential investors and creditors and other users to assess the amounts, timing, and uncertainty of prospective net cash inflows to the enterprise
Separate Valuation each asset or liability must be valued separately. Materiality, only items material in amount or in their nature will affect the true and fair view given by a set of accounts. Historical Cost, transactions are recorded at the cost when they occurred. Realization, revenue and profits are recognized when realized. Duality, every transaction has two effects.
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