Question

a) The IASB’s Framework Conceptual Framework for Financial Reporting requires financial statements to be prepared on the basis that they comply with certain accounting concepts, underlying assumptions and (qualitative) characteristics. Five of these are: Matching/accruals Faithful representation Prudence Comparability Materiality Required:

Briefly explain the meaning of each of the above concepts/assumptions

Answer 1

ACCRUAL:- An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. Accrual Basis means the entity recognises items as assets, liabilities, equity, income and expenses when they satisfy the definition and recognition criteria for those elements in the framework.

MATERIALITY:- Financial Statements result from processing large number of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensand classified data, which form line items in the financial statements. If a line item is not individually material, it is aggregated with other items either in those statements or in notes.

COMPARABILITY:- An entity should present comparative information in respect of the preceeding period for all amounts reported in the current periods financial statements except when permitted or require otherwise.

MATCHING:- This means for every transaction in the financial statements ther should be a DEBIT & CREDIT effect which will ensure balance in the financial statements.

PRUDENCE:- It is also known as Principle of Conservatism, it requires from the bookkeeper to record assets and liabilities as and when they occur and to record revenues when they are assured or realized.

FAITHFUL REPRESENTATION:- It is the concept that financial statements be produced that accurately reflect the condition of a business