In today’s world, companies use
accounting information to conduct a financial analysis of their companies’
operations. Accounting information has quantitative and qualitative
characteristics. Quantitative characteristics are about the estimation of financial transactions.
Qualitative characteristics include the companies owner’s perceived importance of financial
information. Companies require
financial information when making decisions.
In his book
Arnold, J. (1994) wrote about the practical Framework and the four essential concepts.
The first concept is the going concern concept, this concept hypothesize
that an organization will stay in business for the predictable future also this means the organization
won’t be enforced to stop operations and liquidate its assets in the near
future at what may be very low fire-sale rates .By making this assumption, the
accountant is justified in delaying the recognition of specific expenses until
a later period, when the organization will probably still be in business and
using its assets in the most effective way. The second concept is the accruals
(or matching).The matching concept is an accounting
practice though which firms recognize revenues and expenses in the same
accounting period. Firms report revenues, that is, along with the expenses. The purpose
of the matching concept is to avoid misstating earnings for a
period. So, the accountant reports revenues in specific a period without
reporting all the expenses and the result
of this action is overstated the profits. For
example, when an organization makes sales,
majority of it are against credit. Namely, where the customer receives delivery
of goods but promises to make the payment, within 30 days. According with revenue
recognition principle, revenue is recognized when the delivery is made. Now,
there is a risk that the customers may not pay the amount due against those
sales, which results in the company writing off the account receivable as bad
debts expense. The possibility of bad debts exists when the sale is made, so
expense should be recognized right at that moment when the sale is made.
Recognizing bad debts expense requires considerable.
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concept is the consistency concept and this means that the accountant has to applied
consistently in future. Namely this
implies that the business must avoid changing its accounting policy unless on
reasonable grounds. If for any
valid reasons the accounting policy is changed, a business must disclose the
nature of change, the reasons for the change and its effects on the items of
financial statements. This concept is important because of the need
for comparability, that is, it enables investors and other users
of financial statements to easily and correctly compare the financial
statements of a company, and the last concept is the prudence concept.
transactions are uncertain but in order to be relevant the accountant has to
recognize these events in time. The accountant has to make estimates requiring
judgment to counter the doubt, while making judgment the accountant needs to be
hesitant and prudent. One
key accounting principle is prudence that makes sure that revenues, assets and
income are not overstated and liabilities and expenses are not understated and
then the result should be conservatively-stated in financial statements.
Moreover, another way of looking the prudence is when an accountant tends
to delay the
recognition of an asset or revenue transaction until he is certain of it, while
the accountant would tend to record expenses and liabilities at once, as long as the transaction
are likely to happen. Furthermore, neatly accountants review assets to see if
they have declined in value and also they review liabilities to see if they
have increased. In a nutshell, the tendency under the prudence concept is to
either not identify profits or to at least make their recognition late until
the underlying transactions are more certain and as Bendrey,M. (2004) said in
his book, the prudence principle nowadays is known as the “realizations principle ” because the accountant “gains ” only when he “realized ” namely when he
recognized in the period .For example,
some liabilities are contingent upon future occurrence or non-occurrence of an
event such a law suit, etc. We judge the probability of occurrence of that
event and if it is more than 50% we record a liability and corresponding
expense at the most likely amount. Hence, we stop liability and expense from
concepts have been of great practical significance in the development of
accounting in the United Kingdom. In his book Arnold, J. (1994) noted that the
concepts may have conflict with each other and yet there is guidance on how to
resolve such conflicts .There are six criteria for the choice of the accounting
method that actually makes accounting information useful.
First is the reliability
this means that the information should be accurate, true and fair. Relevance
and reliability are both critical for the quality of the financial information,
but both are emphases on the other and vice versa. Hence, we have to trade-off
between them. Accounting information is relevant when it is provided in time, but at early
stages information is uncertain and hence less reliable. After, it is
the comparability which can be achieved by comparing an organization at one
point in time and over time or an organization with other organizations at one
point in time and over time.
One more qualitative
characteristic is the Consistent methods of accounting that must be used from
one period to the next so that meaningful comparisons can be made. Notes may be
included when changes have been made to the method of valuation of the figures.
The understandability is
one more characteristic that must be presented in a form that assists users in
its understanding. We therefore need to consider who the users of the
information are. As an example, the presentation of the Income Statement and
the Balance Sheet, with the various classifications, assist the users to better
understand these reports. This is particularly helpful when the users have
limited accounting knowledge.
Measurement Concept (or Measurability Concept) is the fifth qualitative characteristic,
in this concept only transactions and events that are capable of being measured
in monetary terms are recognized in the financial statements. Namely, all
transactions and events recorded in the financial statements must be reduced to
a unit of monetary currency. Where it is not possible to assign a reliable
monetary value to a transaction or event, it shall not be recorded in the
financial statements. However, any material transactions and events that are
not recorded for failing to meet the measurability criteria might need be
disclosed in the supplementary notes of financial statements to assist the
users in gaining a better understanding of the financial performance and
position of the entity. Cost is the sixth quantitative characteristic .when the
accountant use any accounting method, this method must be evaluated and
implemented according to the benefits that this method has.