Arthur Anderson

Arthur Anderson

Introduction

The world of accounting and finance encompasses accounting principles that have immense importance in how the profession has progressed and is looked upon. As with other professions ethics has been at the heart of this profession and will continue to do so till eternity.

Discussion

There is an exhaustive list of accounting principles and concepts that a business has to comply with. Each of them is discussed in turn.

Accounting principles and concepts

Relevance and reliability

Accounting information provided should be relevant to the users of the information and be of sufficient caliber to be relied upon. It should suit the decision making needs of the stakeholders. It should enable the users to predict future trends and confirm past predictions.

Matching principle

Revenues and expenses should match the period in which they are incurred and hence recorded accordingly. In short it requires expenses to be recognized and recorded in period in which revenues have been recorded (Dechow, 1997).

Faithful representation

The information reflected should be faithfully and honestly represented and should give a true and fair view of accounts.

Prudence

Alternatively known as doctrine of conservatism, prescribes that expenses and liabilities should be recorded as soon as there is a possibility that they will occur, while revenues, income and assets should only be recorded once it is probable that economic benefits will flow to the enterprise (Maltby, 2000).

Comparability and consistency

From one accounting period to another, financial statements should be comparable and consistently represented. Consistency implies that accounting policies applied in one accounting period should be consistently applied in the next accounting period.

Materiality

An item is considered material, if its omission will have significant effect on the ability of the users to make appropriate decisions. Materiality is at the heart of accounting framework.

Going Concern

This is the assumption that the business will continue to operate in the foreseeable future (Boritz, 1991).

Financial transactions as per IFRS and GAAP

International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) prescribe different treatments for financial transactions. Inventory and the way it is calculated and recorded will help illustrate this notion.

As per IFRS inventory may never be recorded as per Last in first out (LIFO) basis. US GAAP, on the contrary allows to record and value inventory on LIFO basis.

Issues in financial accounting

There are several issues that have been encountered and continually are being encountered in financial accounting. Some of them are discussed in turn.

Sustainability reporting

This has been one area which has been often neglected by standard setting bodies. Companies too have been inconsistent in the way this information has been reported. Reporting has been company specific and therefore difficult to compare.

Continued globalization

With increasing globalization and barriers and physical boundaries diluting many have held the view that this has provided with an uneven playing field. Different countries have adopted different presentations of the same IFRS which has meant that interpretation of a standard is a subjective matter with different approaches all of whom being correct.

Different accounting polices

Companies have been using different accounting policies that have made comparisons more ...