Page 211 - Accounting Principles (A Business Perspective)

5. Accounting theory

Modifying Description Importance
Convention
Cost-benefit Optional information should be Lets the accountant know that information that is
included not required should be made available only if its
financial statements only if the benefits exceed its costs. An example may be
benefits companies going to the expense of providing
providing it exceed its costs. information on the effects of inflation when the
In of inflation rate is low and/or users do not seem to
benefit significantly from the information.
Materiality Only items that would affect a Allow accountants to treat immaterial (relatively
knowledgeable user's decision are small dollar amount) information in a theoretically
material (important) and must be incorrect but expedient manner. For instance, a
reported in a theoretically correct way. wastebasket can be expensed rather than
capitalized and depreciated even though it may last
for 30 years.
Conservatism Transactions should be recorded so Warns accountants that assets and net income are
that assets and net income are not not to be overstated. "Anticipate (and record) all
overstated. possible losses and do not anticipate (or record)
any possible gains" is common advice under this
constraint. Also, conservative application of the
matching principle involves making sure that
adjustments for expenses for such items as
uncollectible accounts, warranties, and depreciation
are adequate.
Exhibit 30: Modifying conventions

The financial accounting standards board's conceptual framework project
Experts have debated the exact nature of the basic concepts and related principles composing accounting theory
for years. The debate continues today despite numerous references to generally accepted accounting principles
(GAAP). To date, all attempts to present a concise statement of GAAP have received only limited acceptance.
Due to this limited success, many accountants suggest that the starting point in reaching a concise statement of

GAAP is to seek agreement on the objectives of financial accounting and reporting. The belief is that if a person (1)
carefully studies the environment, (2) knows what objectives are sought, (3) can identify certain qualitative traits of
accounting information, and (4) can define the basic elements of financial statements, that person can discover the
principles and standards leading to the stated objectives. The FASB completed the first three goals by publishing
"Objectives of Financial Reporting by Business Enterprises" and "Qualitative Characteristics of Accounting
15
Information". Addressing the fourth goal are concepts statements entitled "Elements of Financial Statements of
Business Enterprises" and "Elements of Financial Statements". 16

Objectives of financial reporting
Financial reporting objectives are the broad overriding goals sought by accountants engaging in financial
reporting. According to the FASB, the first objective of financial reporting is to:

15 FASB, Statement of Financial Accounting Concepts No. 1, "Objectives of Financial Reporting by Business
Enterprises" (Stamford, Conn., 1978); and Statement of Financial Accounting Concepts No. 2, "Qualitative

Characteristics of Accounting Information" (Stamford, Conn., 1980). Copyright © by the Financial Accounting
Standards Board, High Ridge Park, Stamford, Connecticut 06905, U.S.A. Quoted (or excerpted) with
permission. Copies of the complete documents are available from the FASB.
16 FASB, Statement of Financial Accounting Concepts No. 3, "Elements of Financial Statements of Business
Enterprises" (Stamford, Conn., 1980); and Statement of Financial Accounting Concepts No. 6, "Elements of
Financial Statements" (Stamford, Conn., 1985). Copyright © by the Financial Accounting Standards Board,
High Ridge Park, Stamford, Connecticut 06905, U.S.A. Quoted (or excerpted) with permission. Copies of the

complete documents are available from the FASB.

212