Home » Accounting Explanation » Accounting Concepts and Conventions
An item can be recognized as an asset of business when:
A) When it is sure that the future economic benefits of that item will flow to business
(I.e. the item will help generate income for business)
B) The cost of that item can be measured reliably
(I.e. we can say that an equipment costs 10,000 to business)
To maintain consistency, the presentation and classification of items in accounts or in the financial statements should stay same from one period to another accounting period, except where:
A) There is a significance change in the financial operations or business of a company and review of financial statement indicates that a more appropriate method of presentation should be adopted
B) A change required by GAAPs
It is an accounting principle that fixed assets will be depreciated over their useful life; a company is free to use any method of depreciation to depreciate its assets. If a company selects straight line depreciation method, it is assumed that the company will follow this method of depreciation in the subsequent accounting periods as well. Any change in the method of depreciation will result in inconsistency and affect net profit of the company.
According to materiality concept or principle all MATERIAL ITEMS should be disclosed in the financial statements.
What are material items?
Information about an item is material if its omission or misstatement could influence the financial decision of the users taken on the basis of that information
A company has purchased paper pins for $5. Since this item is immaterial, it could be treated as expenses in income statement and company would not show this item as an asset in balance sheet even though company knows the fact that paper pins will be used more than one year or an accounting period
According to this concept, an entity can't offset assets and liabilities against each other unless:
A) offsetting required by accounting GAAPs
B) Gain, losses and expenses arising from same or similar transactions and these transactions are not material
Example of offsetting can be regarded as when a company set off debtor against same creditor because it's debtor and creditor is a same person, therefore, it is permitted to some extend. However, a company can't off set a debtor with some other creditors