Principles of Accounting

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ACCT 112: PRINCIPLES OF ACCOUNTING 1
ACCOUNTING THEORY NOTES

(a) International Accounting Standards and International Financial Reporting Standards. The foreword to accounting standards defines Accounting Standards as Authoritative statements of how particular types of transaction and other events should be reflected in financial statements. Accounting Standards are developed to achieve comparability of financial information between and among different organizations. International Accounting Standards (IAS’s) and International Financial Reporting Standards (IFRS) are meant to apply to most organizations in the world. IAS’s and IFRS’s are produced by the International Accounting Standards Board (IASB) whose objectives are: (a) To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance; and (b) To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements.

The IASB is an affiliate of the International Federation of Accountants (IFAC) established in 1977 which co-ordinates the Accounting profession worldwide. Most accounting bodies of countries are members of IFAC. The IASC develops IAS’s through an international process that involves the worldwide accountancy profession, the preparers, users of financial statements and national standard setting bodies and other interested parties. The IASB sets up a steering committee to develop a statement of principles, an Exposure Draft and ultimately an Accounting Standards once a new topic is suggested. The process includes:

* Identifying and reviewing of all the issues associated with the topic, * Studying national and regional accounting requirements and practice, consultation with the member bodies’ standard setting bodies and other interested groups, * Public Exposure of the draft Accounting Standard,

* Evaluation by the steering committee and the board of the comments received on exposure drafts.

Currently the IASB has developed about 40 IASs. Examples include: * IAS 1 Presentation of Financial Statements
* IAS 2 Inventories
* IAS 16 Property plant and equipment.

Previously new standards were called International Accounting Standards but from 2003 any new standards will be called International financial Reporting Standards. However in the current practice is to refer to all standards as International Financial Reporting Standard. In Kenya, Accountants used to prepare the financial statements in accordance with Kenya Accounting Standards (IASs), which were developed and published by ICPAK (Institute of Certified Public Accountants of Kenya). This were later dropped and International Accounting Standards adopted. Reasons why Accountants should observe International Accounting Standards:

a) Use of IASs adds credibility to the financial statements as they can be compared with others globally. b) Facilitates communication within an enterprise that has foreign branches or subsidiaries due to harmonized reporting by the separate entities in the group. c) Adds value to the financial statements incase an entity is sourcing for foreign capital. d) Incase an entity wishes to be quoted on the Stock Exchange Market more so for companies.

(c) Accounting Concepts Bases and Policies
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business enterprises. Examples of concepts include: i) The going concern concept: implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations. Financial statements should be prepared under the going concern basis unless the...
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