Lesson Notes By Weeks and Term - Senior Secondary 1
Accounting concepts and conventions
Accounting concepts and conventions
Term: 1st Term
Week: 6
Class: Senior Secondary School 1
Age: 15 years
Duration: 40 minutes of 2 periods each
Date:
Subject: Financial accounting
Topic:- Accounting concept and conventions
SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to
INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source
INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures
INSTRUCTIONAL PROCEDURES
PERIOD 1-2
|
PRESENTATION |
TEACHER’S ACTIVITY |
STUDENT’S ACTIVITY |
|
STEP 1 INTRODUCTION |
The teacher reviews the previous lesson on books of double entry principle |
Students pay attention |
|
STEP 2 EXPLANATION |
She explains the meaning of some accounting concepts
|
Students pay attention and participates |
|
STEP 3 DEMONSTRATION |
She explains the meaning of some accounting conventions |
Students pay attention and participate |
|
STEP 4 NOTE TAKING |
The teacher writes a summarized note on the board |
The students copy the note in their books |
NOTE
ACCOUNTING CONCEPTS AND CONVENTIONS
In drawing up accounting statements, whether they are external "financial
accounts" or internally-focused "management accounts", a clear objective
has to be that the accounts fairly reflect the true "substance" of the
business and the results of its operation.
The theory of accounting has, therefore, developed the concept of a "true
and fair view". The true and fair view is applied in ensuring and assessing
whether accounts do indeed portray accurately the business' activities.
To support the application of the "true and fair view", accounting has
adopted certain concepts and conventions which help to ensure that
accounting information is presented accurately and consistently.
ACCOUNTING CONVENTIONS
The most commonly encountered convention is the "historical cost
convention".
This requires transactions to be recorded at the price ruling at
the time, and for assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of
changing prices in the economy.
The other conventions you will encounter in a set of accounts can be
summarised as follows:
Accountants do not account for items unless they can be quantified in
monetary terms. Items that are not accounted for (unless someone is
prepared to pay something for them) include things like workforce skill,
morale, market leadership, brand recognition, quality of management etc.
This convention seeks to ensure that private transactions and matters
relating to the owners of a business are segregated from transactions that
relate to the business.
With this convention, accounts recognise transactions (and any profits
arising from them) at the point of sale or transfer of legal ownership – rather
than just when cash actually changes hands. For example, a company that
makes a sale to a customer can recognise that sale when the transaction is
legal - at the point of contract. The actual payment due from the customer
may not arise until several weeks (or months) later - if the customer has
been granted some credit terms.
An important convention. As we can see from the application of accounting
standards and accounting policies, the preparation of accounts involves a
high degree of judgment. Where decisions are required about the
appropriateness of a particular accounting judgement, the "materiality"
convention suggests that this should only be an issue if the judgement is
"significant" or "material" to a user of the accounts. The concept of
"materiality" is an important issue for auditors of financial accounts.
ACCOUNTING CONCEPTS
Four important accounting concepts underpin the preparation of any set of
accounts:
Accountants assume, unless there is evidence to the contrary, that a
company is not going broke. This has important implications for the
valuation of assets and liabilities.
Transactions and valuation methods are treated the same way from year to
year, or period to period. Users of accounts can, therefore, make more
meaningful comparisons of financial performance from year to year. Where
accounting policies are changed, companies are required to disclose this
fact and explain the impact of any change.
Profits are not recognised until a sale has been completed. In addition, a
cautious view is taken for future problems and costs of the business (the
are "provided for" in the accounts" as soon as there is a reasonable chance
that such costs will be incurred in the future.
Income should be properly "matched" with the expenses of a given
accounting period.
Key Characteristics of Accounting Information
There is general agreement that, before it can be regarded as useful in
satisfying the needs of various user groups, accounting information should
satisfy the following criteria:
This implies the expression, with clarity, of accounting information in such a
way that it will be understandable to users - who are generally assumed to
have a reasonable knowledge of business and economic activities
This implies that, to be useful, accounting information must assist a user to
form, confirm or maybe revise a view - usually in the context of making a
decision (e.g. should I invest, should I lend money to this business? Should
I work for this business?)
This implies consistent treatment of similar items and application of
accounting policies
This implies the ability for users to be able to compare similar companies in
the same industry group and to make comparisons of performance over
time. Much of the work that goes into setting accounting standards is based
around the need for comparability.
This implies that the accounting information that is presented is truthful,
accurate, complete (nothing significant missed out) and capable of being
verified (e.g. by a potential investor).
This implies that accounting information is prepared and reported in a
"neutral" way. In other words, it is not biased towards a particular user
group or vested interest
EVALUATION: 1. Mention and explain some accounting concepts
CLASSWORK: As in evaluation
CONCLUSION: The teacher commends the students positively