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Homework answers / question archive / QUESTION TWO Accounting practice depends upon the guidance provided by a number of accounting concepts, some of which are to be found in IAS 1 and/or in the conceptional framework of the International Accounting Standards Committee
QUESTION TWO
Accounting practice depends upon the guidance provided by a number of accounting concepts, some of which are to be found in IAS 1 and/or in the conceptional framework of the International Accounting Standards Committee.
Required:
(a) Define and explain the relevance of the following accounting concepts.
(b) Give two examples of situations in which there is a clash or inconsistency between two accounting concepts or conventions, and explain how the inconsistency should be resolved. (In answering this part of the question, you need not confine yourself to considering the concepts listed in part (a))
A.
1. Neutrality : It means disclose the information without any biasness. Neutral depiction is not slanted, weighted, emphasized or de-emphasized or manipulated to increase the probability that financial information will be received favourably or unfavourable by the users. Neutrality concept has great relevance because it shows faithful representation of accounting information.
2. Money Measurement : According to this concept, only those transactions are recorded in the books of account which are in monetary terms or which can be measured in money. This concept is relevant because it helps in making the accounting records easy to understand.
3. Accruals : It attempts to recognise non cash events as they occur. It is concerned with expected future cash receipts and payments. Examples : sales on credit, rent not yet paid etc. This concept has a great relevance because we make records of all expenses and incomes relating to the accounting period whether actual cash has been disbursed or received or not.
4. Substance over form : If information is to represent faithfully then it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. This concept has a relevance because it ensures that financial statements give a complete , accurate and relevant picture of transactions.
5. Consistency : This convention says that accounting practices employed should be consistent which means that practices should not be changed without sufficient reason. e.g. if depreciation is charged on WDV basis then every year same practice must be followed.
B.
1. There is a clash or conflict or trade-off between reporting relevant information in a timely manner and taking time to ensure that information is reliable. If information is not reported in timely manner, it may lose its relevance. Therefore, entities need to balance relevance and reliability in determining when to provide information.
2. There is also a conflict or trade-off between benefit and cost in preparing and reporting the information. In principle, the benefits derived from the information by users should exceed the cost for the preparer of providing it.
3. There is a trafe- off between providing information that is relevant, but is subject to measurement uncertainty e.g. the fair value of financial instrument, and providing information that is reliable but not necessarily relevant e.g. the historical cost of a financial instrument.
