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1.20 Theoretical Framework Principles and Practices of Accounting Paper 1

value should be chosen by the accountant. The golden rule for valuation of current
assets — “cost or market price whichever is lower” originated from this concept.

While the realisation concept states that until materialised no change should be
counted, the conservatism concept further puts a stop to it. It is considered desirable
to guard against all possible losses but not prudent to count unrealised gain.

The three qualitative characteristics of financial statements for this concept are
given in Table 1.3.

Table 1.3 Qualitative Characteristics of Financial Statements

Qualitative Characteristics Functions

Prudence Judgement about the possible future gains which are
uncertain and losses which are to be guarded.
Neutrality To identify and record possible losses as well as to
exclude uncertain gains, an unbiased outlook is required.
Faithful Representation Faithful representation of alternative value.

1.12.11 Consistency

To achieve comparability of the financial statements, the accounting policies are fol-
lowed consistently from one period to another; only in certain exceptional circumstances,
a change in an accounting policy is made.

Whenever alternative methods of accounting are equally acceptable, the concept of
consistency is applied. For example, an organisation may adopt any of several methods of
depreciation such as straight-line method, written-down-value method, etc.
An organisation should change its accounting policy only when:

(i) To bring the Books of Accounts (BOA) in accordance with the issued Accounting
Standards (AS).

(ii) To adhere with the provisions of law.
(iii) New method will reflect a more true and fairer picture.

1.12.12 Materiality

Materiality principle allows other concepts to be ignored, if the effect is not considered
material. This is an exception to full disclosure principle. It is based on the judgement, com-
mon sense and discretion of the accountant to decide which item is material and which is not.

Example: Purchase of low value items like stationery may not be material whereas
purchase of a printer may be material from the company’s point of view.
Materiality is not based only upon the amount of the item but also upon the size
of the business, nature and level of information, level of the person making the
decision, etc.

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