Acf 255 Lecture 2

Compiled by E.
Yeboah
1 ACF 255 FINANCIAL ACCOUNTING 1 [LECTURE 2]
1. Accounting Concepts, Convention, Standards,

Policies and Bases
2. Recognition and Measurement of elements of the
financial statement
LEARNING OBJECTIVES
2
the concepts, conventions, standards, Policies
Discuss and Bases
Discuss the elements of financial statements

the recognition criteria for the elements of the
Identify financial statements
some bases for measuring elements in the
Discuss financial statements
Explain the accounting equation
Explain the double entry principle

E.YEBOAH(CA-GH;ACIB;F.CFIA;MIIAG) 2023-02-17
3 ACCOUNTING CONCEPTS
• Accounting Concepts define the assumptions on the basis of which financial statements
of a business entity are prepared.
• Concepts are those basic assumptions and condition which form the basis upon which the
accountancy has been laid.
4 ACCOUNTING CONVENTION
• An accounting convention refers to common practices which are universally followed in

recording and presenting accounting information of the business entity.
• The accountants have to adopt the usage or customs, which are used as a guide in the
preparation of accounting reports and statements.
• These conventions are also known as doctrine.
5 ACCOUNTING CONCEPTS/EXAMPLES
1. Business Entity Concept

2. Money Measurement Concept
3. Going Concern Concept
4. Periodicity Concept
5. Historical Cost Concept
6. Dual Aspect Concept
7. Matching Concept
8. Realisation Concept
9. Accrual Concept
10.Substance over Form
6 ACCOUNTING CONVENTIONS/EXAMPLES
1. Consistency
2. Full Disclosure
3. Materiality
4. Conservatism
7 BUSINESS ENTITY CONCEPT
• This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate
independent entities.
• It should be noted that the entity assumption is not the same as legal entity.
• The importance of this assumption is that it enables the owner and other interested parties to know the profits earned
by, and the capital employed in, the business.
• The drawback is that this separate existence is artificial.
• The business entity is an empty shell since the resources held by it (assets) are owned by the owner(s) and other
claimants (liabilities), if any.
• At times, especially with sole proprietorships, some assets; for example, motor cars, are both business and private
assets.
8 MONEY MEASUREMENT CONCEPT
• This concept assumes that all business transactions must be in terms of money, that is in
the currency of a country.
• But the transactions which cannot be expressed in monetary terms are not recorded in the
books of accounts. 
• For example, sincerity, loyalty are not recorded in books of accounts because these
cannot be measured in terms of money although they do affect the profits and losses of
the business concern.
9 MONEY MEASUREMENT CONCEPT
 The importance of this assumption is obvious.

 Without it, it will be impossible to summarize the events of the financial year (income statement)
and the position of the business at the end of the year (balance sheet).
 The drawbacks of the money measurement concept are that:
1. Events and facts that cannot be expressed in terms of money are ignored.
2. Money, as a unit of measurement, is unstable; price levels change with inflation.
10 GOING CONCERN CONCEPT
• The assumption here is that the enterprise will continue in operational existence for the foreseeable
future.
• So the balance sheet and the income statement are drawn up on the assumption that there is no
intention or necessity to liquidate or curtail significantly the scale of operation.
• The significance of this assumption is clear. If the assumption were not to hold there would be no
sense to divide assets and liabilities into fixed and current.
• The drawback is that the assumption can be misleading. Because some firms do cease operation not
long after drawing accounts on the going concern basis. In other words, it is not easy to tell from
the final accounts whether the entity will fold up or really continue as a going concern.
11 PERIODICITY CONCEPT
• A business entity is assumed to have a long life (going concern).

• The periodicity concept build on the going concern concept and further assumed that the long life
of a business can be divided into shorter periods so that financial statements, balance sheet and
income statement can be produced at regular intervals.
• Management need information for the conduct of day-to-day operations, evaluation of current
operations, planning future operations and for control purposes. Other parties interested in the
business will also need frequent information for decision-making purposes.
12 PERIODICITY CONCEPT
 You may easily imagine the importance of this assumption.

 Businesses cannot wait indefinitely, till the end of their life, before profits are ascertained or performance is
assessed and tax obligations honoured.
 The drawbacks of the periodicity concept are that:
1. Not all business transactions can be identified with particular accounting period; in practice, many
transactions have consequences for many periods.
2. Periodic income determination becomes problematic and a range of principles has to be developed to
properly relate transactions to specific periods.
3. Arbitrary allocation and apportionment methods may be used.
13 HISTORICAL COST CONCEPT
• This accounting principle states that the assets and liabilities are entered into the books at their actual cost
to the business.
• The importance of the historical cost principle is that it provides the objectivity needed in recording
accounting transactions.
• If assets acquired or obligations incurred were to be measured at their current or realizable values,
subjectivity will set in and different measures will end up with different values for a given single item.
• The drawback is that in times of changing price levels, serious distortion occurs with respect to values of
assets based on historical cost. The values of assets will therefore suffer from representational
faithfulness as the values will be far from their current values.
14 DUAL ASPECT CONCEPT
• Dual aspect is the foundation or basic principle of accounting.

• It provides the very basis of recording business transactions in the books of accounts.
• This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their
respective opposite sides.
• Therefore, the transaction should be recorded at two places.
• It means, both the aspects of the transaction must be recorded in the books of accounts.
• Thus, the duality concept is commonly expressed in terms of fundamental accounting
equation : Assets= Capital + Liabilities
15 MATCHING CONCEPT
• The matching concept states that the revenue and the expenses incurred to earn the revenues
must belong to the same accounting period.
• So once the revenue is realized, the next step is to allocate it to the relevant accounting period.
• This can be done with the help of accrual concept.
• If the revenue is more than the expenses, it is called profit.
• If the expenses are more than revenue it is called loss.
• This is what exactly has been done by applying the matching concept.
16 MATCHING CONCEPT
• Therefore, the matching concept implies that all revenues earned during an accounting year,
whether received/not received during that year and all cost incurred, whether paid/not paid
during the year should be taken into account while ascertaining profit or loss for that year.
• Significance
• It guides how the expenses should be matched with revenue for determining exact profit or
loss for a particular period.
• It is very helpful for the investors/shareholders to know the exact amount of profit or loss
of the business.
17 REALISATION CONCEPT
• This concept states that revenue from any business transaction should be included in the
accounting records only when it is realized.
• The term realization means creation of legal right to receive money.
• Selling goods is realization, receiving order is not.
• In other words, it can be said that : Revenue is said to have been realized when cash has been
received or right to receive cash on the sale of goods or services or both has been created.
• The concept of realization states that revenue is realized at the time when goods or services
are actually delivered.
18 REALISATION CONCEPT
• Example:
• A company received an order to supply goods worth $10,000. The company supply goods
worth $7,500 up to the year ending 31st December, 2021 and suppled the rest of the goods
in January, 2022.
• The revenue for the year 2021 for the company is $7,500.
• Mere getting an order is not considered as revenue until the goods have been delivered.
19 ACCRUAL CONCEPT
• This concept assumes that revenues are recognised when they become receivable whether cash is
received or not; and expenses are recognised when they become payable whether cash is paid or
not.
• Revenues and expenses will be recorded in the accounting period to which they relate.
• Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right
to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards
expenses.
• The accrual concept under accounting assumes that revenue is realized at the time of sale of goods
or services irrespective of the fact when the cash is received.
20 SUBSTANCE OVER FORM
• Information should represent the substance or economic reality of the

financial transactions, even if the economic reality is not consistent with the
legal position.
• An example of ‘substance over form’ arises when an entity effectively

controls the use of an item of equipment even though it is not the legal
owner. The equipment should be treated as an asset.
21 CONSISTENCY CONVENTION
• This means that same accounting principles should be used for preparing financial
statements year after year.
• A meaningful conclusion can be drawn from financial statements of the same enterprise
when there is comparison between them over a period of time.
• But this can be possible only when accounting policies and practices followed by the
enterprise are uniform and consistent over a period of time.
• If different accounting procedures and practices are used for preparing financial
statements of different years, then the result will not be comparable
22 FULL DISCLOSURE CONVENTION
• This requires that all material and relevant facts concerning financial statements should be fully
disclosed.
• Full disclosure means that there should be full, fair and adequate disclosure of accounting information.
• Adequate means sufficient set of information to be disclosed.
• Fair indicates an equitable treatment of users.
• Full refers to complete and detailed presentation of information.
• Thus, the convention of full disclosure suggests that every financial statement should fully disclose all
relevant information.
23 FULL DISCLOSURE CONVENTION
• Let us relate it to the business.

• The business provides financial information to all interested parties like investors, lenders, creditors,
shareholders etc.
• The shareholder would like to know profitability of the firm while the creditor would like to know the
solvency of the business.
• In the same way, other parties would be interested in the financial information according to their
requirements.
• This is possible if financial statement discloses all relevant information in full, fair and adequate
manner.
24 MATERIALITY CONVENTION
• The convention of materiality states that, to make financial statements meaningful, only
material fact i.e. important and relevant information should be supplied to the users of
accounting information.
• The question that arises here is what is a material fact.
• The materiality of a fact depends on its nature and the amount involved.
• Material fact means the information of which will influence the decision of its user.
25 CONVENTION OF CONSERVATISM
• This convention is also known as prudence.

• The convention is based on the principle that “Anticipate no profit, but provide for all possible losses”.
• It provides guidance for recording transactions in the books of accounts.
• It is based on the policy of playing safe in regard to showing profit .
• The main objective of this convention is to show minimum profit.
• Profit should not be overstated.
• If profit shows more than actual, it may lead to distribution of dividend out of capital. This is not a fair
policy and it will lead to the reduction in the capital of the enterprise.
26 CONVENTION OF CONSERVATISM
• Thus, this convention clearly states that profit should not be recorded until it is realized.
But if the business anticipates any loss in the near future provision should be made in the
books of accounts for the same.
• For example, valuing closing stock at cost or market price whichever is lower, creating
provision for doubtful debts, discount on debtors, writing off intangible assets like
goodwill, patent, etc.
• The convention of conservatism is a very useful tool in situation of uncertainty and
doubts
27 ACCOUNTING STANDARDS
• An accounting standard is a standardized guiding principle that determines the policies and practices of financial
accounting.
• Accounting standards not only improve the transparency of financial reporting but also facilitates financial
accountability.
• An accounting standard is relevant to a company’s financial reporting.
• Some common examples of accounting standards are segment reporting, goodwill accounting, an allowable method
for depreciation, business combination, lease classification, a measure of outstanding share, and revenue recognition.
28 ACCOUNTING STANDARDS
• The Generally Accepted Accounting Principles (GAAP) is the primary accounting

standard adopted by the U.S. Securities and Exchange Commission (SEC).
• GAAPs were designated in the United States and form the basis of accepted accounting
standards for preparing and reporting financial statements across the world.
29 INTERNATIONAL FINANCIAL REPORTING

STANDARDS (IFRS)
• International Financial Reporting Standards (IFRSs) are set by the International Accounting
Standards Board (IASB), which was established in 2001 to replace the International
Accounting Standards Committee (IASC).
• International Accounting Standards (IAS) was the name used for all the standards until the
end of 2002, and International Financial Reporting Standards(IFRS) has been used since
2003.
• Both standards are applicable until the time that the IASs have been replaced by the IFRSs.
30 IFRS
• In addition to the standards themselves, interpretations are issued in order to clarify

certain provisions of an original standard.
• Interpretations for IASs were developed by the Standing Interpretations Committee (SIC)
and those for IFRSs are developed by the International Financial Reporting
Interpretations Committee).
31 IFRS
• The standards are divided into four main parts:

1. definitions
2. measurement of the elements of financial statements
3. recognition of the elements of financial statements
4. disclosure requests
 For certain standards, an enterprise may choose from two treatments of a particular issue,
either a "benchmark" treatment or an "allowed alternative" treatment.
32 IFRS VS GAAP
• The International Financial Reporting Standards (IFRS) and the Generally

Accepted Accounting Principles (GAAP) are accounting principles that provide
guidelines on how companies should prepare financial statements.
• GAAP is used in the U.S.A whilst IFRS is used by other countries.
• IFRS is more principles-based and, therefore, can better capture the
economics of a certain transaction.
• GAAP on the other hand, is a more rules-based approach.
33 ACCOUNTING POLICIES
• Accounting policies are rules and guidelines that are selected by a company
for use in preparing and presenting its financial statements.
• Accounting policies are important, as they set a framework, which all
companies follow, and provide comparable and consistent standard financial
statements across years and relative to other companies.
34 ACCOUNTING POLICIES
• Accounting policies can vary among different companies and geographies.

• However, most companies generally follow one of the two accounting
standards – the Generally Accepted Accounting Principles(GAAP) or the
International Financial Reporting Standards (IFRS).
• Accounting policies are different from accounting principles, as the principles
are the overarching accounting rules, whereas policies are the way a
company follows the rules.
35 CONSERVATIVE VS AGGRESSIVE POLICIES
• Conservative accounting policies understate a company’s current financial performance and show
better financial performance in subsequent years. It is a more sustainable approach and it allows
companies to show improvement over the years, which is a positive signal for investors.
• Aggressive policies tend to employ accounting policies in a way such that they overstate the
performance in earlier years, and it leads to a decline in a company’s performance in later years
(even though the company may be doing well).
• Aggressive accounting policies can also raise a red flag from auditors or investors if they feel
management is misrepresenting earnings or allocating costs.
36 ACCOUNTING BASIS
• The basis of accounting refers to the methodology under which revenues and expenses
are recognized in the financial statements of a business. They are:
1. Cash Basis
2. Accrual Basis
3. Modified Cash Basis
37 CASH BASIS
• Under the cash basis of accounting, a business recognizes revenue when cash is received,
and expenses when bills are paid.
• This is the easiest approach to recording transactions, and is widely used by smaller
businesses.
38 ACCRUAL BASIS
• Under the accrual basis of accounting, a business recognizes revenue when earned and expenses
when expenditures are consumed.
• This approach requires a greater knowledge of accounting, since accruals must be recorded at
regular intervals.
• If a business wants to have its financial statements audited, it must use the accrual basis of
accounting, since auditors will not pass judgment on financial statements prepared using any other
basis of accounting.
39 MODIFIED CASH BASIS
• A variation on these two approaches is the modified cash basis of accounting.

• This concept is most similar to the cash basis, except that longer-term assets are also
recorded with accruals, so that fixed assets and loans will appear on the balance sheet.
• This concept better represents the financial condition of a business than does the cash
basis of accounting.
40
Elements of Financial Statements

RECAP…
41
• The statement of financial position at the end of the
reporting period
• The statement of profit or loss and other

comprehensive income for the reporting period
Do you recall the components • Statement of cash flows for the reporting period
of a complete set of financial
statements? • Statement of changes in equity for the reporting period
• Notes comprising summary of significant accounting

policies and other explanatory information
ELEMENTS OF FINANCIAL STATEMENTS
42
Income
Expenses
Financial statements are constructed using the
elements of the financial statements. Hence, the
elements are the building blocks. Assets
Liabilitie
s
Equity
SUMMARY OF THE ELEMENTS OF FS
43
Directly related to • Income

performance • Expenses
• Assets
Directly related to • Liabilities
financial position
• Equity
ASSETS
44
The Conceptual Framework

defines an asset as ‘a present
economic resource controlled
by the entity as a result of past
events.
An economic resource is a
right that has the potential to
produce economic benefits.’
ASSETS CLASSIFICATION
45
• Current assets are cash and other assets that the business
In the statement of financial position, assets expects to convert into cash, sell or use up within one
are categorized into two main types: year.
Current Examples: cash, marketable securities, prepaid

Assets expenses, receivables, inventory.
• Non-current assets have potential to produce economic

Assets
benefits for more than a year.
Non-current Examples: Property, plant and equipment, Financial

Assets assets such as government bonds, Intangibles such as
patents, trademarks, goodwill.
LIABILITIES
46
The Conceptual Framework defines

a liability as a ‘present obligation of
the entity to transfer an economic
resource as a result of past events.’
An obligation is a duty or
responsibility that the entity has no
practical ability to avoid.’
LIABILITIES CLASSIFICATION
47
It is usual to categorise liabilities in the
statement of financial position into two: • Current liabilities are obligations payable within a year
Current • Examples: bank overdraft, account payables, accrued

Liabilities expenses, short-term loans, unearned revenues.
Liabilities • Non-current liabilities are amounts not payable within

the next year.
Non-current • Examples: long-term loans, mortgages payable, bonds

Liabilities payable.
EQUITY
48is the residual interest in the business
• Equity
that belongs to its owner or owners after the
liabilities have been deducted from the
assets. It is therefore sometimes referred to
as the ‘net assets’
Equity
• Equity represents the amount of capital
invested in the business by the owners. (Net Assets)
Other Reserves
• Equity consists of share capital (owners' Share Capital Income Surplus
(e.g.,
contribution), retained profits, and other (Retained
reserves. (Stated Capital) Revaluation
Earnings)
Surplus)
INCOME
49
Income is increases in assets, or decreases in

liabilities, that result in increases in equity, other
than those relating to contributions from holders of
equity claims.
INCOME CLASSIFICATION
50
From activities that

constitute the entity’s central • The term ‘revenue’ means income
operations earned in the course of normal business
operations.
Revenue
Income
Gains
• In a statement of profit or loss, revenue
and ‘other income’ are reported as
From peripheral transactions separate items.
of an entity
EXPENSES
51
Expenses consist of:
expenses arising in the ordinary course of

activities, including the cost of sales, wages and
Expenses are decreases salaries, the cost of the depletion of non-current
in assets, or increases assets, interest payable on loans and so on
in liabilities, that result
in decreases in equity,
other than those losses arising from disasters such as fire and
relating to distributions flood, losses from disposing off non-current
to holders of equity assets for less than their carrying value.
claims.
RELATIONSHIP AMONG
FINANCIAL STATEMENTS
52
• The statement of profit or loss and the statement
of financial position are separate statements but
they are also related to each other.
• The statement of profit or loss ends with a figure

for the net profit for the period. Profit belongs to
the owner (or owners) of the business.
• It is therefore an addition to the owner’s equity.
• Profit for the year is therefore added to owners’

capital in the statement of financial position at
the end of the year.
53
Recognition and Measurement

of Elements in Financial Statements
RECOGNITION
54
• The process of capturing for inclusion in the

financial statements an item that meets the
definition of an asset, a liability, equity, income
or expenses.
RECOGNITION CRITERIA
55
• For an element to be recognized in

the financial statement, it must
meet the fundamental recognition
criteria of: Recognition is appropriate if it results in both
relevant information about assets, liabilities,
equity, income and expenses and a faithful
representation of those items, because the
• Relevance aim is to provide information that is useful to
investors, lenders and other creditors.
• Faithful Representation
MEASUREMENT
56
• Putting monetary amount on an element of

financial statement
MEASUREMENT BASES
57
Historical cost • Based on acquisition cost or the original cost of the item
• The price that would be received to sell an asset, or paid to transfer

Fair value a liability, in an orderly transaction between market participants at
the measurement date
Value in use • Reflects entity-specific current expectations about the amount,

(assets)/fulfilment value timing and uncertainty of future cash flows
(liabilities)
• The current amount that will be paid to acquire an equivalent asset
Current cost or received to take an equivalent liability
Net Realizable (Settlement) • Based on the net amount that would be realised in the event of
value disposing off the item
• Based on the discounted future cash flows associated with the

Present (Discounted) Value usage of the item
58
DOUBLE ENTRY AND

ACCOUNTING EQUATION
ACCOUNTING EQUATION
59
Financial accounting is based upon a simple idea known
as Accounting Equation
Claims over
Resources
the
of a
resources of
business
the business
ACCOUNTING EQUATION
60
Liabilitie
Assets
s
ACCOUNTING EQUATION
61
Equity
Assets (Owner’s
Equity)
ACCOUNTING EQUATION
62
Equity
Assets (Owner’s Liabilities
Equity)
EFFECTS OF TRANSACTIONS ON ACCOUNTING EQUATION
63
Identify the items Determine whether the

item is an asset, a
involved in the liability or capital
transactions (owner’s equity)
Determine whether the

Explain the effect of
item has increased or
the transaction on the
decreased as a result of
accounting equation
the transaction
DOUBLE ENTRY PRINCIPLE
64 • All transactions affect two items.
• Accounting shows the effect of the transactions on the two items

by:
a debit entry (left of a/c)
a credit entry (right of a/c)
• Each transaction must have a debit and corresponding credit

entry
A Debit Entry
A Credit Entry
SUMMARY OF DOUBLE ENTRY PRINCIPLES
65
Accounts To record Entry in account
Asset Increase Debit

Decrease Credit
Expense Increase Debit

Decrease Credit
Liability Increase Credit

Decrease Debit
Equity Increase Credit

Decrease Debit
Revenue Increase Credit

Decrease Debit
Statement of Financial Position
As at 31 December 20XX
Current assets
66 Cash on hand $ 4 000
Cash in bank 6 800 $10 800
Non-current assets
Store equipment 28 000
Less Acc depn 10 000 18 000
Total assets 28 800
Current liabilities
Accounts payable 8 000
Non-current liabilities
Bank loan 10 000
Total liabilities 18 000
Net assets $10 800
Owner’s equity
Capital 10 400
Profit (loss) 400
Total equity $ 10 800
Statement of Profit and Loss and Other Comprehensive Income
For the Year Ended 31 December 20XX
67
Cash Flow Statement
68
Statement of Changes in Owner’s Equity
69
70
THANK YOU
CONTACT: 0244271879/eddie.yeboah401@gmail.com

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1 ACF 255 FINANCIAL ACCOUNTING 1 [LECTURE 2]

1. Accounting Concepts, Convention, Standards,

Discuss the elements of financial statements

Explain the accounting equation

Explain the double entry principle

• An accounting convention refers to common practices which are universally followed in

1. Business Entity Concept

7 BUSINESS ENTITY CONCEPT

8 MONEY MEASUREMENT CONCEPT

9 MONEY MEASUREMENT CONCEPT

 The importance of this assumption is obvious.

10 GOING CONCERN CONCEPT

• A business entity is assumed to have a long life (going concern).

 You may easily imagine the importance of this assumption.

13 HISTORICAL COST CONCEPT

14 DUAL ASPECT CONCEPT

• Dual aspect is the foundation or basic principle of accounting.

• Information should represent the substance or economic reality of the

• An example of ‘substance over form’ arises when an entity effectively

22 FULL DISCLOSURE CONVENTION

23 FULL DISCLOSURE CONVENTION

• Let us relate it to the business.

• This convention is also known as prudence.

• The Generally Accepted Accounting Principles (GAAP) is the primary accounting

29 INTERNATIONAL FINANCIAL REPORTING

• In addition to the standards themselves, interpretations are issued in order to clarify

• The standards are divided into four main parts:

• The International Financial Reporting Standards (IFRS) and the Generally

• Accounting policies can vary among different companies and geographies.

35 CONSERVATIVE VS AGGRESSIVE POLICIES

39 MODIFIED CASH BASIS

• A variation on these two approaches is the modified cash basis of accounting.

Elements of Financial Statements

• The statement of profit or loss and other

• Notes comprising summary of significant accounting

Directly related to • Income

The Conceptual Framework

Current Examples: cash, marketable securities, prepaid

• Non-current assets have potential to produce economic

Non-current Examples: Property, plant and equipment, Financial

The Conceptual Framework defines

Current • Examples: bank overdraft, account payables, accrued

Liabilities • Non-current liabilities are amounts not payable within

Non-current • Examples: long-term loans, mortgages payable, bonds

Income is increases in assets, or decreases in

From activities that

expenses arising in the ordinary course of

• The statement of profit or loss ends with a figure

• It is therefore an addition to the owner’s equity.

• Profit for the year is therefore added to owners’

Recognition and Measurement

• The process of capturing for inclusion in the

• For an element to be recognized in

• Putting monetary amount on an element of

• The price that would be received to sell an asset, or paid to transfer

Value in use • Reflects entity-specific current expectations about the amount,

• Based on the discounted future cash flows associated with the

DOUBLE ENTRY AND