Financial statements are prepared in accordance with established guidelines. Understanding the objectives of financial reporting is helpful in understanding these guidelines. As discussed in the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Concepts No. 1, the objectives of financial reporting are to provide information that In order to prepare the financial statements, it is important to adhere to certain fundamental accounting concepts. 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.
Aids current and prospective investors, creditors, and other users in determining the amounts, timing, and uncertainty of prospective net cash inflows to the enterprise. Separate Appraisal Each asset and liability must be valued independently.
Only items that are material in amount or nature will have an impact on the true and fair view provided by a set of accounts. Historical Price, Transactions are recorded at the time they occur at the cost. Revenue and profits are recognised when they are realised. Every transaction has two outcomes.
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