WHAT IS ACCOUNTING?

The systematic recording, reporting, and analysis of financial transactions of a business

Businesses are crucial to accounting and must prepare financial statements

WHAT ARE ACCOUNTING CONCEPTS?

Ground rules of accounting that should be followed in preparation of all accounts and financial statements

These rules must be followed by accountants who work for any business or are entrepreneurs in their own firm

WHAT IS HISTORICAL COST ACCOUNTING?

The financial accounting based on the original cost of an item ignoring inflationary increases. Records an asset based on its actual value without any adjustments for inflation On a balance sheet the values of assets are the Purchase cost of the asset

WHAT IS CURRENT COST ACCOUNTING?

Also known as market value accounting A form of accounting in which the approach to capital maintenance is based on maintaining the operating capability of a business Assets measured according to replacement cost The adjustments called market-to-market
Mutual funds usually price their shares daily based on the last trade of the day

ADVANTAGES OF CURRENT
COST ACCOUNTING
More relevant

Provides up-to-date information with financial market Takes inflationary adjustments into account Critics have argued market value (current cost) reveals economic realities that are hidden by historical cost accounting.

CONTINUED...
Investors and creditors also prefer the market value accounting The information about the market value at the reporting date, the changes in that value and the components of that change- all provide the investors with valuable information for his decision making. In financial statements , easier to view and determine whether the asset or liability is at risk or not

DISADVANTAGES OF CURRENT
COST ACCOUNTING
Unreliable
if the information is unreliable, it should not be used to make financial decisions. Volatile When market price of an asset or liability is not available, the value is estimated (inappropriate) Cannot provide the same relevant and reliability in case of measuring the appreciation.

MEASUREMENT OF THE ELEMENTS OF

FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement.

MEASUREMENT OF THE ELEMENTS OF

FINANCIAL STATEMENTS

This involves the selection of the particular basis of measurement.

Historical cost Current cost Realizable (settlement) value. Present value.

Examples :Inventories are usually carried at the lower of cost and net realizable value. Marketable securities may be carried at market value. Pension liabilities are carried at their present value

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, capital is synonymous with the net assets or equity of the entity.

Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.

The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements

FINANCIAL CAPITAL MAINTENANCE

Financial capital maintenance Under this concept a profit is earned only if the financial amount of the net assets at the end of the period exceeds the financial amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

PHYSICAL CAPITAL MAINTENANCE

Under this concept a profit is earned only if the physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss.

THE DIFFERENCE BETWEEN THE TWO

CONCEPTS

The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity.

In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.