Accounting Principles
🟢 Lite — Quick Review (1h–1d)
Accounting principles are the rules that govern how financial statements are prepared under IFRS and ASBE, ensuring information is relevant, reliable, comparable, and understandable.
Core Equations:
- Assets = Liabilities + Equity
- Profit = Income – Expenses
- Debits = Credits (trial balance always balances)
Key Principles:
- Entity – business distinct from owner
- Going concern – assume operations continue
- Accrual – record when earned/incurred, not when cash moves
- Prudence – anticipate losses, not gains (don’t assume profits)
- Consistency – same accounting methods period to period
- Materiality – ignore items too trivial to affect decisions
- Substance over form – record economic reality, not just legal form
- Matching – charge expenses in the period they help generate revenue
- Historical cost – record assets at original cash price paid
Exam tips: Section A MCQs test identification of principles; Section B written answers (5–10 marks) ask you to critique accounting treatments. Watch “accrual vs cash basis” and “substance over form” — common trap scenarios.
🟡 Standard — Regular Study (2d–2mo)
Qualitative Characteristics and the Conceptual Framework
The IFRS Conceptual Framework guides financial reporting. Information must possess relevance (capable of influencing user decisions) and faithful representation (complete, neutral, accurate). Enhancing characteristics include comparability, verifiability, timeliness, and understandability.
Elements of Financial Statements
Financial statements recognise five elements when they meet definition and measurability criteria: assets (probable future economic benefits controlled), liabilities (present obligations from past events), equity (residual interest), income (wealth increases), and expenses (wealth decreases).
Measurement Bases
| Base | Description |
|---|---|
| Historical cost | Original cash price paid |
| Current cost | Replacement cost today |
| Realisable value | Net selling price |
| Present value | Discounted future cash flows |
Historical cost dominates practice; current value bases apply in specific contexts.
Core Assumptions and Principles
Going concern assumes the entity will continue operating for at least 12 months. Accrual basis records transactions when rights/obligation arise, not when cash changes hands. Substance over form demands economic reality override legal appearance — critical in sale-and-leaseback and contingent consideration scenarios. Prudence requires anticipating foreseeable losses but prohibits anticipating unrealised gains.
Exam Pattern
Questions frequently present a scenario with several journal entries or accounting treatments and ask: (1) identify which principles apply, (2) assess whether the treatment complies with IFRS, (3) suggest corrections. Section B answers require you to explain why a principle is relevant, not merely name it.
🔴 Extended — Deep Study (3mo+)
Dual Aspect Concept and the Accounting Equation
Every transaction affects at least two accounts (debit and credit). This dual aspect principle underlies the fundamental equation: Assets = Liabilities + Equity. Any imbalance in the trial balance indicates an error in applying this principle — a common exam checking point.
Matching vs. Revenue Recognition — Edge Cases
The matching principle requires expenses to be recognised in the period they contribute to earning revenue. However, timing mismatches arise in long-term contracts (percentage of completion vs. completed contract method), prepaid expenses, and depreciation allocation. The revenue recognition principle (IFRS 15) addresses this by linking revenue to performance obligations satisfied over time or at a point — students frequently confuse this with the receipt of cash (accrual vs. cash basis).
Prudence — Over-Provisioning Risk
Prudence demands caution but does not allow creation of hidden reserves. IFRS prohibits deliberate understatement of assets or overstatement of liabilities to manipulate profits. A frequent mistake is applying prudence by accelerating ALL expenses — only probable, quantifiable losses trigger recognition.
Materiality — Not Purely Quantitative
Materiality has both quantitative (usually 5–10% of a benchmark) and qualitative dimensions. An amount below the threshold may still be material if it affects covenant compliance, masks a trend, or involves fraud. Students should identify qualitative materiality triggers in scenario questions.
Common Mistakes Summary
- Treating historical cost as a principle (it’s a measurement base)
- Ignoring going concern when assessing solvency — leads to liquidation basis errors
- Applying prudence to create undisclosed reserves
- Confusing accrual with revenue recognition
- Misapplying matching by deferring costs that have no future benefit
- Ignoring substance over form in complex arrangements (e.g., consignment stock, joint ventures)
- Treating consistency as absolute — a change in method is permissible if it improves faithful representation, with disclosure
Practice Prompts
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Scenario: A company uses historical cost for PPE but revalues investment properties to fair value. Analyse which principles apply and whether IFRS permits this mixed approach.
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Scenario: Revenue of ₨5 million is recognised when goods are shipped despite a “sale-or-return” clause allowing return within 60 days. Critically evaluate the application of revenue recognition, prudence, and substance over form.
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