Accounting conventions and principles

Vocabulary to be memorized

1. arise виникати

2. accruals concept принцип нарахування

3. to account for враховувати

4. anticipate передбачати

5. assign to відносити до

6. benefits прибутки

7. to carry forward переносити в іншу графу, на інший рахунок

8. to confuse сплутати, заплутувати, ускладнювати

9. conflict конфлікт, зіткнення

10. convention прийняте правило

11. cautious обережний, обачний

12. consistency concept/principle принцип постійності

13. conservatism консерватизм, conservatism concept принцип консерватизму

14. encompass включати (у собі), торкатися; оточувати

15. extreme надзвичайний, an extreme case надзвичайний випадок

16. foreseeable передбачуваний, foreseeable losses передбачуваний збитки

17. matching concept/convention принцип відповідності

18. mandatory обов'язковий

19. going concern principle принцип діючого підприємства

20. money measurement principle принцип грошового виміру

21. provisions положення, умови; асигнування

22. prudence обережність, передбачливість

23. override перевершувати, переважати

24. а true and fair view достовірна картина

Read the text to explain what requirement is overriding for presenting financial statements.

The definition of the word "principle" is, to some extent, a problem in accounting. The point is that it means a slightly different thing in different countries. For example, in the US it tends to mean conventions of practice. Thus, the American Generally Accepted Accounting Principles encompass a lot of broad and detailed accounting rules. On the contrary, in Britain the detailed rules of this sort are called practices. As for broader matters like "accruals or conservatism, or money measurement" they are traditionally referred to as concepts or conventions. At the same time the word "principle" means something more fundamental and theoretical.

There are four broad well-established principles of accounting: going concern concept, conservatism, consistency and matching. These fundamental and ancient principles are accepted in all the countries of the world.

But still their usage is sometimes confused. The problem with them in any country is that there is potential for conflict. For example, a going concern, the matching concept suggests that development costs ought to be carried forward and matched against the future revenues. It is also assumed that revenues must be assigned to the accounting period when they are received. As for expenses they must be assigned to the accounting period in which they were used to produce revenues.

At the same time prudence suggests that because it is possible that no benefits will arise, all research and development costs should be charged as expenses. This principle demands that the accountant should cautious in the valuation of assets or profits. It means that first always taking the lowest reasonable estimate of the value of assets, and second, always anticipating losses but never anticipating profits.

Both in the UK and Commonwealth countries a true and fair view is the overriding legal requirement for presenting financial statements. The law demands that all the conventions should be interpreted in the context of normal accounting practice. In the UK the law requires that extra information must be disclosed if this is necessary to give a true and fair view. In extreme cases, detailed provisions of the law may be departed from, if this is the only way of giving a true and fair view.

Answer the following questions.

1. Why is the definition of the word principle a problem in accounting?

2. What is meant by accounting principles in the US?

3. What does GAAP (Generally Accepted Accounting Principles) encompass in the US?

4. What are detailed accounting rules called in Britain?

5. What are such matters as accruals, conservatism and the like referred to?

6. What does the word "principle" mean?

7. What principles of accounting are accepted throughout the world?

8. Why is the use of accounting principles sometimes confused?

9. What does the matching concept suggest?

10. What does the prudence concept imply?

11. Why is a true and fair view an overriding legal requirement for presenting financial statements?