ACCOUNTING RULE : CHAP 10

Accounting principles are the

fundamental guidelines and
concepts that govern the field of
accounting. They ensure
consistency, reliability, and
comparability in financial
reporting. The main principles
include:

A business entity refers to an

organization or structure that is
established to conduct commercial
activities. It is considered a separate
legal unit from its owners, which
allows it to own assets, incur
liabilities, enter contracts, and
conduct business operations in its own
name. The concept of a business
entity is important for accounting and
legal purposes, as it helps to
distinguish between personal and
business finances. Ex.
Partnership,limited company, sole
trader, non profit organisation

The consistency principle in

accounting refers to the practice of
applying the same accounting
methods and procedures from one
financial period to the next. This
principle ensures that financial
statements are comparable over time,
making it easier for stakeholders—
such as investors, creditors, and
management—to analyze and
understand a company’s performance.

The principle of duality in

accounting, also known as the dual
aspect concept, is a foundational idea
that states that every financial
transaction has equal and opposite
effects in at least two accounts. This
principle forms the basis of double-
entry bookkeeping, which ensures that
the accounting equation (Assets =
Liabilities + Equity) remains balanced.

The going concern principle is a

fundamental accounting assumption
that assumes a business will continue
to operate indefinitely and will not be
forced to halt operations or liquidate
its assets in the near future. This
principle is crucial for financial
reporting and has several key
implications:

The historical cost principle is an

accounting concept that states that
assets should be recorded and
reported at their original purchase
price, or cost, at the time of
acquisition. This principle is
foundational in accounting and has
several important implications. Ex.
Original Purchase Price: Assets are
recorded based on the amount paid to
acquire them, including all expenses
necessary to bring the asset to its
intended use (e.g., purchase price,
shipping costs, installation fees).

The matching concept is an

accounting principle that states that
expenses should be recognized in the
same period as the revenues they
help generate. This principle ensures
that financial statements accurately
reflect a company’s financial
performance during a specific period,
providing a clearer picture of
profitability.

The materiality principle is an

accounting concept that asserts that
financial information should be
disclosed in a way that is relevant and
useful to users of financial
statements. This principle emphasizes
that not all information has the same
level of importance; only information
that could influence the decisions of
users should be considered "material."
Ex. Definition of Material Information:
Material information is anything that
could affect the economic decisions of
users, such as investors, creditors,
and management. This includes
financial data that could impact the
assessment of a company’s financial
performance or position.

The money measurement

principle is an accounting concept
that states that only transactions and
events that can be measured in
monetary terms are recorded in the
financial statements. This principle
ensures that all financial data
presented is quantifiable and
expressed in a consistent currency,
providing clarity and reliability in
reporting. Ex. Only transactions that
can be measured in monetary terms
are recorded. This means that
subjective or qualitative aspects, such
as employee morale or brand
reputation, are not included in the
financial statements unless they can
be assigned a monetary value.

The prudence principle, also known

as the conservatism principle, is an
accounting guideline that advises
caution in financial reporting. It
emphasizes that revenues and profits
should only be recognized when they
are assured, while expenses and
losses should be recognized as soon
as they are anticipated. This principle
aims to prevent overstatement of
financial position and performance.
Ex. a company should not recognize
revenue from a sale until the product
has been delivered and payment is
reasonably assured. Recognize
expenses and potential losses as soon
as they are foreseeable, even if the
actual loss has not yet occurred. This
ensures that financial statements
reflect potential liabilities.

The realization concept is an

accounting principle that dictates
when revenue should be recognized in
the financial statements. According to
this principle, revenue is recognized
only when it has been earned and is
realizable, meaning that the goods or
services have been delivered or
performed, and the payment is
reasonably assured.
International Accounting
Standards, are a set of accounting
principles and guidelines issued by the
International Accounting Standards
Committee (IASC). These standards
were developed to promote
consistency and transparency in
financial reporting across different
countries and industries. And
statements are prepared with the
same rule and guidelines.

Comparability is a fundamental
characteristic of financial reporting
that enables users to identify and
understand similarities and
differences between financial
statements across different entities or
time periods. This concept is crucial
for investors, analysts, and other
stakeholders who rely on financial
information to make informed
decisions.

Relevance is a fundamental
characteristic of financial information
that indicates how useful that
information is for decision-making
purposes. In accounting and financial
reporting, relevant information helps
users assess past, present, or future
events and make informed decisions
regarding their investments, credit,
and resource allocation.

Reliability is a fundamental
characteristic of financial information
that ensures the data presented in
financial statements is accurate,
complete, and trustworthy. Reliable
information provides a solid basis for
decision-making by users, such as
investors, creditors, and management.

Understandability is a key
characteristic of financial information
that emphasizes the clarity and
simplicity of the data presented in
financial statements. It ensures that
users can easily comprehend the
information, allowing them to make
informed decisions based on it.
Capital Expenditure (CapEx)
Definition: Capital expenditure refers
to funds used by a business to
acquire, upgrade, or maintain physical
assets such as property, buildings,
machinery, and equipment. These
expenditures are aimed at enhancing
the productive capacity or operational
efficiency of the business.
Key Features:
1. Long-Term Benefit: CapEx is
typically associated with long-term
investments that are expected to
provide benefits over multiple
accounting periods (e.g., several
years).
2. Capitalization: Unlike
operating expenses, which are
deducted from revenues in the
period they are incurred, CapEx is
capitalized. This means the cost is
recorded as an asset on the
 balance sheet and is depreciated or
amortized over its useful life.
3. Examples:
o Purchasing new machinery or

equipment.
o Constructing a new building or

facility.
o Renovating or upgrading

existing assets.
o Acquiring land or property.

Capital Receipts
Definition: Capital receipts are funds
received by a business that arise from
non-operational activities, particularly
from the sale of long-term assets or
financial investments. These receipts
do not arise from the company's
primary business operations.
Key Features:
1. Non-Recurring: Capital
receipts are often non-recurring,
meaning they do not occur
regularly like revenue from sales.
2. Types:
o Sale of Assets: Proceeds from
selling property, plant, or
equipment.
o Loan Proceeds: Funds received
from borrowing or issuing debt.
o Equity Financing: Money
received from issuing shares to
investors.

Revenue Receipts
Definition: Revenue receipts refer
to the income generated from the
core operations of a business. These
are inflows of funds that occur
regularly and are directly associated
with the sale of goods or services.
Key Features:
1. Recurring Income: Revenue
receipts are typically recurring and
arise from the primary activities of
 the business, such as sales or
service revenue.
2. Impact on Income
Statement: Revenue receipts are
recorded in the income statement
as revenue, directly affecting the
business's profitability for the
period.
3. Examples:
o Sales of products or services.

o Interest income earned on

investments.
o Rental income from leasing

property.
Revenue Expenditure
Definition: Revenue expenditure
refers to the costs incurred in the
day-to-day operations of a business.
These are outflows of funds that are
necessary to maintain and manage
the business's ongoing activities.
Key Features:
1. Short-Term Benefit: Revenue
expenditures typically provide
benefits within a single accounting
period. They are necessary for the
day-to-day functioning of the
business.
2. Immediate Expense
Recognition: Unlike capital
expenditures, which are capitalized
and depreciated, revenue
expenditures are expensed in the
period they are incurred, reducing
the net income for that period.
3. Examples:
o Salaries and wages paid to

employees.
o Rent and utilities.

o Office supplies and maintenance

costs.
o Advertising and marketing

expenses.
Inventory valuation is the process
of determining the monetary value of
a company's inventory at a given
time. It plays a critical role in financial
reporting, tax calculation, and
management decision-making
Net Realisable Value (NPV) is a
financial tool used to assess the
profitability of investments by
comparing present values of cash
inflows and outflows.
Inventory is always value at lower cost
or net realisable value. This is an
application f prudence concept, as
over valueing the inventory will
overstate both profit and asset

Net realizable value (NRV) is the

estimated selling price of an asset in
the ordinary course of business, minus
any costs that are necessary to make
the sale. It’s commonly used in
accounting to determine the value of
inventory or accounts receivable.
The formula for NRV can be expressed
as:
NRV=Estimated Selling Price−Costs to
SellNRV=Estimated Selling Price−Cost
s to Sell
This concept helps ensure that assets
are reported on the balance sheet at
an amount that is expected to be
realized in cash, reflecting a more
accurate financial position of a
company. If the NRV is lower than the
carrying amount of an asset, it may
need to be written down.
Example:
Imagine a company has 100 units of a
product that it originally purchased for
$10 each. The total cost of the
inventory is:
Total Cost=100 units×$10=$1,000Tot
al Cost=100 units×$10=$1,000
Now, suppose the company estimates
that it can sell each unit for $15, but it
will incur $200 in selling costs (like
shipping, commissions, etc.).
Calculate NRV:
1. Estimated Selling Price:
Estimated Selling Price=100 units×$1
5=$1,500Estimated Selling Price=100
units×$15=$1,500
2. Costs to Sell:
Costs to Sell=$200Costs to Sell=$200
3. Net Realizable Value:
NRV=Estimated Selling Price−Costs to
SellNRV=Estimated Selling Price−Cost
s to SellNRV=$1,500−
$200=$1,300NRV=$1,500−
$200=$1,300

n this case, the NRV of the inventory is

$1,300. Since the total cost of the
inventory ($1,000) is less than the
NRV, the company would report the
inventory at its cost of $1,000.
However, if the NRV were lower than
the cost, the inventory would need to
be written down to its NRV.

100 unit
Estimated selling price 10 dollar per
piece
Selling cost 150 dollar

Total cost 1500

Nrv 850