Issues in Accounting

Practices
Assignment No. 1
Submitted To:
Sir Saleem
Submitted By:
Iqra Javed
Registration No. MB1-003

1: What are the basic accounting theories?

Answer:
Accounting operates within the broad socio-economic environment. It is difficult to discuss the
one area of accounting relating to the other area in practical terms. We should greatly emphasis
on the conceptual framework. So, the accountant not only knows but he should understand.
A.I.C.P.A: Accountancy may be defined as the art of recording, classifying and summarizing
in a significant manner and in terms of money, transactions and events, which are in part, at least
of financial character, and interpreting the results thereof.
From the definition, we can say that accounting helps to find following information:

The nature and amounts of income/expense.

The nature and amounts of profit/loss.
The volume of capital employed.
The nature and values of prepaid assets & outstanding liabilities.

Accounting theory:
A theory means a definite directive principle. There is always a reason behind every action of a
human being. A man does not anything without any sound reason. The basic accounting theories
are held by conceptual framework of accounting. The conceptual framework is defined by many
accounting standard boards like A.I.C.P.A, FASB. The study of accounting theory involves a
review of both the historical foundations of accounting practices, as well as the way in which
accounting practices are verified and added to the regulatory framework that govern financial
statements and financial framework.
Accounting as a discipline has existed since the 15th century. Accounting theory is the
continuously evolving subject, as it must adapt new technologies, new businesses, new standards
and gaps. Organizations such as the International Accounting Standards Board help create
practical applications of accounting theory, and professionals such as CPAs help companies
negative accounting standards.
According to Prof. Hendriksen, Accounting theory may be defined as logical reasoning in the
form of a set of broad principles that provide a general frame of reference by which accounting
practice can be evaluated and guide the development of new practices and procedures.
There are many objectives of learning accounting theory.
By learning accounting theory you can know the reason behind all the accounting
practices.

After learning accounting theory you can know that accounting is not a boring or dull
subject.
An accountant, with the help of accounting theories, can perform his work skillfully and
flawlessly.
An accountant, with the help of accounting theory, cannot only understand his job
problems better, but also can make others understand the same in a better way.
Valuation of various assets and liabilities can be more or less accurately if the accountant
has the knowledge of accounting theory.

2: What is the departure from accounting theory?

Answer:

Basic accounting principles

Basic accounting principles, as mentioned earlier, are general decision rules which govern the
development of accounting techniques. Some call them basic accounting features.
The Revenue Principle:
It is also called the realization principle; the revenue principle incorporates a definition of
revenue. It states that revenue should be realized when sale is made on the other hand when cash
or cash equivalent of any other item received. Revenue principle holds that it should be measured
in the period in which it is earned or realized. In identifying revenues with a specific period for
measurement proposes, one must look to when the various transactions occurred rather than to
the period in which the cash inflows occurred.
The Cost Principle:
Cost is the amount, measured in money, of cash expanded or other property. In other words,
expenses are the using or consuming of goods and services in the process of obtaining revenues.
An expense is recognized in the period in which it is incurred which is not necessarily the same
time as the period in which cash is paid. The period an expense is deemed to be incurred is the
period in which the goods and services are received. Expenses are measured by the valuation of
the goods and services used or consumed. The historical cost has been regarded as the
appropriate valuation basis for recognition of expenses.
The Matching Principle:
The matching principle holds that all of the expenses incurred in generating revenue should be
identified or matched with the revenue generated, period by period. We should look to the
purpose for which expenses were incurred. If the purpose was to generate revenues, the expenses
should be identified with the period in which that revenue was recognized or earned.

The exception or modifying principles

The objective of financial reporting, the postulates and the concepts provide a general framework
for development of accounting principles.
Cost benefit:
The cost benefit modifying principle constraint holds thats the cost of applying an accounting
principle should not exceed its benefit. In other words, the benefit to be gained from providing
additional accounting information should greater than the cost of providing it.
Materiality:
The FASB has issued many statements of financial accounting standards during the past 25
years. Each SFAS issued by the board has concluded by saying that the provision of this
statement need not to be applied immaterial items.
Consistency:
The consistency principle holds that in accounting process, all concepts principles and
measurements approaches should be applied in a similar or consistent way from one period to the
next in order to assure that the data reported in the financial statements are reasonably
comparable over time.
Conservatism:
This is another user constraint in the application of basic accounting principle. This principle
holds that when more than one accounting alternative is permissible for a transaction, the one
having the least favorable immediate effect on net income or owners equity usually should be
selected.
Timeliness:
One of the primary qualities desired in useful accounting information is that it should be
relevant. Timeliness is an ingredient of relevance. The information that is given to the users of
financial reports should be current and supplied frequently. If old and late information is
presented to make rat it hampers their abilities to make rational decisions.
Industry practices:
Practical considerations may require departure from the basic principles. The unique
characteristic or the peculiar nature of some industries and business enterprises require the use of
different accounting methods and procedures to produce realistic and useful financial reporting.

Industry practices constraints:

The industry practices constraint, also called the industry practices concept, states that the nature
of certain industries and their practices can require the departure of traditional accounting theory.
In other words, some industries have practices unlike any other that require specialized
accounting or reporting. The industry practices constraint allows these industries to go outside of
traditional accounting principles as long as it is infrequent and justifiable.
Most industry practices that depart from traditional GAAP only conflict with one or two
accounting principles. In other words, an industry can't completely disregard GAAP because of
their specialized practices. They can bend one or two accounting principles for good reasons.
This makes sense because every industry is different and faces different financial reporting
challenges. Every industry wouldn't be able to follow the same exact guidelines and rules
without incurring significant costs. The industry practices constraint goes hand in hand with the
cost benefit principle. Sometimes conforming to GAAP is too costly for some industries, so they
have adopted slightly modified practices.