Accounting Concepts, Conventions and Regulatory Framework
Accounting Concepts, Conventions and Regulatory Framework
This domain tests the assumptions that make financial statements coherent and the rules that govern published accounts. Concepts are not arbitrary: they resolve timing, measurement and disclosure questions.
Core concepts
- Business entity: the business is separate from its owner.
- Going concern: the entity is expected to continue operating for the foreseeable future.
- Accruals: income and expenses are recognised when earned or incurred, not when cash moves.
- Consistency: the same policies are applied from period to period unless a change is justified.
- Prudence: caution is used under uncertainty, without deliberate understatement.
- Historical cost, realisation, materiality and periodicity guide measurement and disclosure.
Regulatory framework
International Financial Reporting Standards are issued by the IASB. In Nigeria, the Financial Reporting Council of Nigeria oversees adoption of IFRS, while the Companies and Allied Matters Act sets company reporting duties. Financial statements must give a true and fair view and comply with applicable standards.
Worked example
Wages paid during the year are ₦700,000. Opening accrued wages are ₦30,000 and closing accrued wages are ₦50,000. The expense is ₦700,000 − ₦30,000 + ₦50,000 = ₦720,000. The opening accrual was paid this year but belonged to last year; the closing accrual was incurred this year but remains unpaid. Accruals accounting matches the expense to the period benefited.
Traps that cost marks
- Using prudence to justify hidden reserves or deliberate understatement.
- Confusing consistency with refusing all justified policy changes.
- Recording expenses on a cash basis while claiming accruals accounting.
- Treating materiality as a fixed amount rather than a matter of judgement.