Day 167 General accepted accounting principles

General accepted accounting principles

The objective of financial reporting is to provide information of the reporting entity that is useful to internal and external users in making decisions. Therefore, the accounting framework sets out plenty of requirements and assumptions in order to maintain the quality of the report. 

There are several assumptions established the foundation of accounting process. For example, the accrual accounting is the basis method of generating the accounting report. It means that the effects of transactions and other events are recognized when they occur, and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. In addition, the going concern is another common assumption. Which assumes that the business will operate long enough to carry out its existing objectives. This assumption is critical, since the PPE would be recorded at their liquidation value rather than their cost if the going concern principle is not recognized. 

On the other hand, there are also many qualitative characteristics of financial reporting, which ensure the utility of decision making. The two fundamental qualitative characteristics are relevance and faithful representation. For a financial information to be relevance, it must affect the outcome of a decision. So if the information has enough materiality, it has an impact on an entity’s overall financial condition and operations. Thus the user’s decision may be influenced by it. Moreover, the characteristic of faithful representation ensures that users can trust or depend on the information provided in financial statements. Hence the information should have complete depiction, neutral and free from bias/error. Furthermore, comparability, verifiability, timeliness and understandability are the enhancing qualitative characteristics for the financial reporting. Where comparability require the accounting report is comparable within the industry. The verifiability relates to the ability to support or confirm the existence and amount of an event or transaction. Timeliness needs the information to be provided in a timely manner, so the relevance is not lost. At last, the understandability assumes the users of information have sufficient knowledge to understand the report, so complex information should not be excluded from the reports. 

In conclusion, the financial report should be provided according to these assumptions and qualitative characteristics. However, the cost-benefit analysis on the cost of gathering information and the benefit granted to users from such information should be balanced.