Core Definition
- →Accounting identifies, measures, records, communicates financial information systematically.
- →Process bridges economic events to stakeholder decision-making.
- →Foundation for AS-1 accounting policies disclosure requirements.
Core concepts
- 01Accounting: process of identifying, measuring, recording and communicating financial info.
- 02Going concern: entity will continue for the foreseeable future (typically 12 months).
- 03Accrual basis: revenue/expenses recorded when earned/incurred, not when cash flows.
- 04Consistency: same accounting policies applied period to period unless change is justified.
- 05Prudence: anticipate no profit, but provide for all probable losses.
- 06Materiality: items significant enough to influence decisions must be disclosed.
Flowchart summary
Accounting Concepts | +-- Going Concern ----> entity continues +-- Accrual --------> earned / incurred +-- Consistency ----> uniform policies +-- Prudence -------> conservatism +-- Materiality ----> disclose if relevant
Exam-critical pointers
- ⭐AS-1 disclosure of accounting policies is a 4-mark theory favourite.
- ⭐Distinguish fundamental assumptions (going concern, consistency, accrual) from conventions.
- ⭐Substance over form: record economic reality, not legal form (e.g., hire purchase).
- ⭐Money measurement concept excludes qualitative factors (employee morale, brand loyalty).
Visual mind-map
Chapter
Theoretical Framework - Principles & Practice of Accounting
Fundamental Assumptions
- →Going Concern: entity continues operations for foreseeable future (≥12 months).
- →Accrual Basis: revenue/expenses recorded when earned/incurred, not cash receipt/payment.
- →Consistency: identical accounting policies applied across periods unless justified change.
Guiding Principles
- →Prudence: anticipate no profit; provide for all probable losses conservatively.
- →Materiality: disclose items significantly affecting stakeholder decisions; assess quantitatively and qualitatively.
- →Substance over Form: record economic reality (e.g., hire purchase asset recognition).
Limitations & Exclusions
- →Money Measurement: only quantifiable items in currency; excludes qualitative factors.
- →Non-monetary factors excluded: employee morale, brand loyalty, reputation impact.
- →Cannot capture intangibles unless separately identifiable/purchased.
AS-1 Key Requirements
- →Disclosure of accounting policies mandatory; common 4-mark theory question.
- →Distinguish fundamental assumptions from conventions in written answers.
- →Justify policy changes with impact disclosure; consistency principle critical.
Exam-Critical Distinctions
- →Assumptions vs. Conventions: assumptions underlie measurement; conventions govern presentation.
- →Accrual vs. Cash: accrual matches revenue/expenses to period earned/incurred.
- →Prudence vs. Prudent: conservatism principle prevents overstatement of assets/profits.
Explained simply
Imagine you're running a pretend toy shop with your friend. Accounting is like keeping a special notebook where you write down every toy you sell, every toy you buy, and how much money you have. It's a way to tell the story of your shop's money. 📓
Why does your toy shop need this? Because then you and your friend know if the shop is doing well or if you're losing toy money. Without the notebook, you'd just guess, and guessing gets you in trouble.
Here's how it actually works. Let's say your lemonade stand sells lemonade on Monday, but your friend pays you on Wednesday. In real accounting—called accrual basis—you write down the sale on Monday when you made the lemonade, not Wednesday when you got the money. That's because the work was done on Monday, even if the coins came later. Also, you promise yourself: "I will always count my money the same way every week" (that's consistency), and you always imagine bad stuff might happen, so you save extra coins just in case (that's prudence, or being careful). 🍋
The big rule grown-ups follow is this: assume your lemonade stand will stay open forever (going concern), so you plan for next month and next year, not just today.
Here's what real accountants remember: always tell the true money story in your notebook, even if it looks different from what the rules say on paper—because the real story is what matters to your boss.
Make it click