1.
Prudence concept
The prudence concept is an accounting principal that encourages the accountant to exercise a degree of
caution when preparing the financial statements and it is an conservative approach when recognizing
the assets and liabilities. This means potential losses or liabilities should be recognized as soon as
possible as they are probable but potential gains should only be recognized when they are virtually
certain.
It also tells the accountants to choose the option that is less likely to overstate assets or income when
there are uncertainties.
Example
1. Provision for bad debts
2. Adjusted revenue
3. Change in the useful life, (Life changed after 5 years, reduced the useful life in order to record
the high depreciation)
4. Impairment of investments
2. Matching Principle
It is the fundamental accounting concept that tell that expenses should be recognized in the same
accounting period as the revenue they help to generate to determine the true profitability over a
specific period.s
A. Revenue-Expense Matching ; The cost associated with generating the revenues are recognized
in the same period as the revenue earned.
B. Accural basis Accounting ; the matching principle says that expenses should be recorded when
they are incurred (Goods or service received), rather than when the cash is paid.
C. Timing of expenses recognition ; Under the matching principle, expenses can include costs such
as salaries, performance related pay, utilities and they are recognized in the income statement
when they contribute to generate the income
Examples
1. Depreciation (Spread depreciation over the useful life)
2. Amortization of grant
3. Accrual of utilities, wages
Materiality Concept:
Definition: The materiality concept in accounting holds that financial information
should be presented and disclosed in a manner that is material in nature. Materiality is
assessed based on the impact that errors, omissions, or misstatements could have on
the decision-making of users of the financial statements. Information is considered
material if its omission or misstatement could influence the economic decisions of users.
Key Points:
1. Significance to Users: Materiality is determined with regard to the significance of
information to the users of financial statements. Information is material if its omission or
misstatement could impact the economic decisions made by users.
2. Judgment and Professional Skepticism: Professional judgment and skepticism play a
crucial role in assessing materiality. Accountants use their judgment to evaluate whether
information is material in the context of the overall financial statements.
3. Balance with Cost: Materiality is also considered in relation to the cost of providing and
obtaining information. It's not practical to disclose every minor detail; hence, materiality
helps strike a balance between relevance and cost
Certainly! Here are definitions for a few more key concepts within the conceptual
framework of accounting:
Materiality Concept:
Definition: The materiality concept in accounting holds that financial information
should be presented and disclosed in a manner that is material in nature. Materiality is
assessed based on the impact that errors, omissions, or misstatements could have on
the decision-making of users of the financial statements. Information is considered
material if its omission or misstatement could influence the economic decisions of users.
Key Points:
1. Significance to Users: Materiality is determined with regard to the significance of
information to the users of financial statements. Information is material if its omission or
misstatement could impact the economic decisions made by users.
2. Judgment and Professional Skepticism: Professional judgment and skepticism play a
crucial role in assessing materiality. Accountants use their judgment to evaluate whether
information is material in the context of the overall financial statements.
3. Balance with Cost: Materiality is also considered in relation to the cost of providing and
obtaining information. It's not practical to disclose every minor detail; hence, materiality
helps strike a balance between relevance and cost.
Substance over Form Principle:
Definition: The substance over form principle is a fundamental accounting concept that
emphasizes the economic reality of transactions rather than their legal form. It requires
that financial statements reflect the underlying economic substance of transactions,
even if the legal form suggests a different treatment.
Key Points:
1. Economic Reality: Substance over form ensures that financial reporting reflects the
economic substance of transactions, focusing on the true economic impact rather than
merely the legal structure.
2. Avoidance of Window Dressing: The principle helps prevent entities from
manipulating financial statements through legal structuring without a corresponding
economic impact.
3. Fair Presentation: Financial statements should present a true and fair view of an entity's
financial position and performance, and the substance over form principle contributes to
achieving this objective.
