Accounting Concepts and Principles: A Comprehensive Guide

This report provides a comprehensive guide to accounting concepts and principles, focusing on their evaluation and explanation. It discusses the Australian accounting regulatory framework and the conceptual framework, using Iluka Limited as an example. The report covers concepts such as separate legal entity, money measurement principal, accounting period, historical cost, full disclosure, going concern concept, conservatism/prudence, dual aspect, and materiality. It also explores the issues related to measurement and the fundamental qualitative characteristics of financial information.

ADVANCE FINANCIAL
ACCOUNTING

Contents
INTRODUCTION.................................................................................................................................................3
DESCRIPTION OF ACCOUNTING CONCEPTS............................................................................................4
 SEPARATE LEGAL ENTITY/ BUSINESS ENTITY:............................................................................4
 MONEY MEASUREMENT PRINCIPAL:...............................................................................................4
 ACCOUNTING PERIOD:........................................................................................................................5
 HISTORICAL COST:...............................................................................................................................5
 FULL DISCLOSURE:..............................................................................................................................6
 GOING CONCERN CONCEPT:............................................................................................................6
 CONSERVATISM/ PRUDENCE:...........................................................................................................7
 DUAL ASSPECT:.....................................................................................................................................7
 MATERIALITY:.............................................................................................................................................8
CONCEPTUAL FRAMEWORK AND ISSUES RELATED WITH MEASUREMENT...................................8
FUNDAMENTAL QUALITATIVE CHARACTERSTICS..................................................................................9
CONCLUSION:..................................................................................................................................................10
REFERENCES:.................................................................................................................................................11

INTRODUCTION
This report shows all the accounting concepts and principals. It focus on evaluate and explain
the accounting concepts and principles in order to emerge conceptual framework and its
impacts on various accounting practices. This assignment will briefly explain and understand
the Australian accounting regulatory framework and the conceptual framework. The following
report will be based on an Australian listed company that is Iluka limited. The accounting
concepts will be identified and briefly explained with the help annual reports of Iluka limited,
Australia. The accounting principles will also give an example from iluka limited.

DESCRIPTION OF ACCOUNTING CONCEPTS
The accounting concepts are those rules and assumptions which a business or a firm should
follow while recording the transactions and preparing different accounts. Certain rules and
principles have been followed to maintain discipline, consistency and uniformity in the
financial records or financial books. Hence to record the different kinds of nature of
transactions the organization needs to follow some of these concepts and principles
(Measurement, 2017). These principles and concepts are briefly explained and discussed
below:
 SEPARATE LEGAL ENTITY/ BUSINESS ENTITY:
This principal states that the business is separate from its owner, manager and creditor. All
the transactions are recorded from business point of view and the point of view of owner is
ignored, for example: bought a thing from reliance and not from Ambani. The money which is
put in to the firm or the business is known as capital. It is assumed that a loan is taken by the
business from the owner which is known as capital. The interest paid to the owner on capital
by the organization is an expense for the business because it reduces the profit of the
business. (Wang, Dou and Jia, 2016). At the same time, it increases the capital of the owner.
The amount which is used for personal use by the owner is called drawings from the
business. Hence the above given statement states that according to this principal business is
separate and different from the business or the firm.
 MONEY MEASUREMENT PRINCIPAL:
The transactions and events which are done or are expressed in terms or basis of money are
only recorded in the financial books. Any event or transaction will not be recorded in the
financial books until it is measured in terms of money. For example: any kind of fights or
disputes in the firm like any dispute between HR and management will not be recorded in the
financial books. Strike is beginning. This has not been proofed that the competition has given
a competitive product in the market (IASB's restructured Conceptual Framework raises thorny
issues, 2017). If a businessman has fifty thousand in cash, five machines, hundred chairs and
twenty fans all things cannot be recorded in the financial records or transaction books as they
are not expressed in basis of money such as cash 50 thousand, machines 20 thousands
chairs 10 thousand and fans 80 thousand. Hence those transactions, events or things which

are not measured in terms of money will not be recorded in the books of accounts and only
those transactions which are expressed or can be expressed in terms of cash will be recorded
in books of accounts (Arnold, 2012).
 ACCOUNTING PERIOD:
This principle states that a business or an organization runs for a continuous period of time,
but to calculate profits and the expenses of business it would become more difficult to
calculate it in a long period hence the business is divided in small intervals and small periods
in which the profits and expenses are calculated very easily. (Christensen, Nikolaevand
Wittenberg‐Moerman, 2016). The two different accounting period that are usually adopted by
the organizations are:
1st January to 31st December: the calendar year
1st April to 31st March: the accounting year
Since some business use the calendar year for recording transactions and calculating the
profit of firm and some of the firms use the second accounting period to record transactions
and calculate the profit.
 HISTORICAL COST:
The cost at which the asset was purchased or the cost at which the transaction of any asset
was done is known as its historical cost, this cost of asset is recorded in the books of
accounts, since this transaction and cost is shown from the past it is known as historical cost.
(Pratapand Urrutia, 2012). For example: if owner of a business purchases an asset like
building at twenty hundred thousand it will be recorded in the books of finance at that price
only any further change, any increase or decrease in the market price will not affect the
financial records and thus the building will be recorded on that price only. If two year later the
market value of building increase to sixty hundred thousand, this amount will not be recorded
in the financial records or financial books. The cost of asset will also be reduced year to year
by charging depreciation on it. Since the cost on which the asset is recorded is from the past
it is known as historical cost (Schaltegger and Burritt, 2017).
JUSTIFICATION OF THE CONCEPT:

 The market value or the current value of assets is difficult to determine. The valuation by one
expert will not be same as that of another.
 The market value of asset will keep on changing but it would become extremely difficult to
keep records and track of the changes in the market price.
 FULL DISCLOSURE:
This principal states that all the significant information related to business should be
completely disclosed. Thus any information which is related or is of material interest needs to
be disclosed in front of everyone required. Such as owner, investor, creditor. The companies
act has made provisions regarding the disclosure of any important information(Andon, Baxter
and Chua, 2015). The pro formal (pattern) and contents of financial statement and profit and
loss account are prescribed by act. Various items which do not find place in the accounting
statement are shown under financial statement by way of foot note:
 Contingent liability
Case pending in court
Guarantee undertaken
 Market value of investment and asset should be given by the way of foot note.
Hence the above given principal states that each every accounting information should be
disclosed which is known as full disclosure.
 GOING CONCERN CONCEPT:
People may come and people may go but the firm goes and goes forever. According to this
concept the firm or the company will not be dissolved anytime, but the company will continue
for an unspecified time. People and owners of the firm may live or may die but the firm will not
be dissolved. According to this concept, firm will go forever and hence the asset will also be
continued forever so the depreciation is charged on the asset for the whole of its life. This
concept helps a lot in maintaining and preparing financial records. The owner of the firm may
go insane, may die, or get bankrupt but the firm will not dissolve. The firm will get new owner
and will run all of its life (Parker, L. D. and Northcott, D. 2016).

 CONSERVATISM/ PRUDENCE:
This principal states that all the losses for the future which are already known should be
recorded in the financial books and all the known profits for future should be ignored and not
be recorded in the financial books, this is also known as playing safe. Following are the
application of the principle:
Example: the closing stock is always recorded at a price lesser that is either the cost price or
the market price. Provision for doubtful debt is created in anticipation of actual bad debt.
Provision for pending law suit against the firm which may either be decided in favor.
EFFECTS OF CONSERVATISM:
The principal of conservatism should be used very carefully otherwise it will have two effects:
 Profit and loss account will disclose lower profit in comparison to actual profit.
 Balance sheet will show understatement of assets and over statement of liability or
understatement of liability and over statement of assets which is known as window dressing.
 DUAL ASSPECT:
This concept states that each every transaction has an equal and dual aspect, at least two
accounts are affected by each transactions, if one account is credited then the other account
is debited. The principal of double entry system runs on every transaction and every
transaction is recorded on that basis only. The two sides of balance sheet are always equal
and runs on the following transaction:
Asset = capital + liability
Example: X started a business with twenty hundred thousand cash and takes a loan of five
hundred thousand from the bank these twenty five hundred thousand are used for the
purchase of assets:
Asset = twenty five hundred thousand
Capital = twenty hundred thousand
Liability= five hundred thousand

25= 20+5
Debit = credit
(double entry system)
 MATERIALITY:
According this concept items having significant effect or being relevant to the users are to be
disclosed. The items with lesser priority or with the least interest are left or to be merged out
otherwise accounting statement will be over-burdened, it should be noted that what is
material for the one business may be immaterial for the other business.
Example: the cost of small tool may be material for small workshop. But the same may be
immaterial for escort limited. A difference of five hundred in stock counting is regarded as
immaterial but the difference of five hundred in cash could be termed as material (Basic
Accounting Concepts, 2019). The accountant should judge the importance of each
transactions.
The Iluka resources limited has applied the accounting concept in its accounting statements
and reports which has been prepared on the basis of Australian standard and other
regulations of Australian ASBIFRS (Accounting standards board and international financial
reporting standards). The books of accounts of Iluka limited are prepared on the basis of
conservatism or prudence concept, dual aspect concept, accounting period and the full
disclosure concept (Nobes and Stadler, 2015 )
CONCEPTUAL FRAMEWORK AND ISSUES RELATED WITH MEASUREMENT
The process of calculating the economic and the accounting transactions of a firm with the
help of information related with the activities of firm is known as accounting measurement.
The different principles of this measurement are:
Objectivity: The information of financial activities should be true, reliable and certifiable
otherwise it would be of no use.

Consistency: The concept states that a method once used to record transactions in the
financial records or books should be followed forever, otherwise the firm will not be able to
compare profit and growth year to year or anytime needed.
Matching: According to this concept the losses and the revenues of an accounting year
should match against each other.
The Iluka limited uses matching and objectivity concept to measure its financial instruments.
The company has a reliable Information of financial activities which help them to calculate the
accounting transactions very easily, hence they use objective concept. All the losses recorded
in the books of accounts match the revenues of the accounts. The company shows a
conceptual framework in its books of accounts. Iluka limited faced some issues while using
these concepts. The concept includes a barrier that is if the losses are not matched with the
revenues the whole accounts will have to be revised and prepared again (Koehler, et al.,
2014 ).
These measurements are effective but face some issues. The decisions related to process,
policies, planning and controlling are affected by the management. It is useful in allocating the
capital across corporations, economic sectors, people and countries. This assists
in determinant failure and success of business. it's known in terms of bonus given
to staff, quantity of dividend and taxpaying capability of organization. There area unit
faces many problems connected with measuring in accounting that affects its overall method
(Granof, et al., 2016 ).
FUNDAMENTAL QUALITATIVE CHARACTERSTICS
There are some characteristics that are mandatory to be present in the financial information.
The quality of monetary transactions of business is maintained with the help of these
qualities:
RELEVANCE: the information ought to be relevant to the wants of the users, that is that
the case within which the data influences the economic choices of users.
This may involve coverage explicit relevant info or could also be the
data whose statement might influence the Economic choices of the prevailing users.

Financial info is
beneficaial only it's confirmative and prognosticativeprice. Confirmative price helps
the bourgeois to analyses and check previous evaluations and assumptions. Prognosticative
price assists users in assumptive futures outcomes of monetary information. Materiality is a
crucial component of this quality. It state that something that's material for Associate in
nursing organization might not be material to alternative party. Information is taken into
account as material once it's necessary enough to see the choice of its users. Nature and
size of business entity affects materiality of its information (Cheng, et al., 2014).
 FAITHFUL REPRESNETATION: It is a crucial thought to be thought-about whereas getting
ready monetary statements. This includes correct reflection of actual position of company’s
business. Trustworthy illustration should be followed all told the steps of accounting and
in each a part of monetary statements. There square measure 3 attributes that has got to be
followed for representing books of accounts dependably. These square measure given below:
• All info given in monetary statements should be complete. It ought to show clear image of
money flows and monetary position of entity.
• There mustn't be any error in monetary statements. Fraud and falsehood should be avoided.
• Books of accounts should show unbiased info relating to business. It ought to represent real
position of the corporate.
CONCLUSION:
It is hereby concluded that the accounting concepts plays a very important role in the life of a
business. Without the accounting principles and concepts the firms would not be able to
record any transactions properly in the books of accounts, thus the accounting concepts are
to be applied in each and every transaction and financial records of the firms. The Iluka
limited has followed the concepts and has maintained a uniformity in the books of accounts,
hence their accounts can be easily handled. Thus it concludes that accounting principles are
vital in business.

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