DEVELOPMENT OF ACCOUNTING RULES AND CONCEPTS
Accounting could be defined as the process of recording, classifying, summarising, interpreting and
communicating financial information to enable users make decisions.
Accounting concepts are basic assumptions and ideas that guide how accounting records are prepared.
Accounting rules (standards) are formal guidelines issued by professional bodies to ensure uniformity
and reliability in accounting practice.
Accounting did not start with rules. It evolved gradually as business activities became more complex.
Stages in the Development of Accounting
(a) Early Record-Keeping Stage
Accounting started as simple record-keeping. Traders only recorded cash received and paid. There were
no rules or concepts. The purpose was to know who owes what.
(b) Introduction of Double-Entry Bookkeeping (1494)
It was introduced by Luca Pacioli. It states that: Every transaction has two aspects: debit and [Link]
double entry booking led to the proper classification of:
Assets, Liabilities, Capital , Income and expenses
(c) Emergence of Accounting Concepts
As businesses expanded, accountants needed common principles to guide reporting.
Major accounting concepts developed:
* Business Entity Concept: This states that only business transactions are entered in the books of
account. This business is treated as an entity separate from the owner. The items recorded in the books
of the business are therefore, restricted to the books of the business only.
*Going Concern Concept: This is the assumption that a business will continue for the foreseeable future,
unless otherwise stated. A business is not suppose to be a temporary affair.
*Accrual Concept: This states that income should be recognised when they are earned, not when they
are received and expenses should be treated when they are incurred, not when they are actually paid.
*Consistency Concept: This states that once an accounting method is chosen, it should be used
[Link] allows comparison of financial results over time. Example: Using the same depreciation
method every year.
* Periodicity concept: This states that financial statements are to be prepared at regular intervals
(usually one year).
These concepts helped ensure: Uniformity, Comparability, Reliability
(d) Growth of Companies and Need for uniformity, separation of ownership from management,
increase in shareholders and investors, and rising cases of fraud and manipulation created demand
for:
*Clear accounting rules
*Standard methods of reporting
(e) Development of Accounting Standards
Governments and professional bodies [Link] standards were issued to regulate
[Link]:
*Generally Accepted Accounting Principle (GAAP)
* International Accounting Standards (IAS)
* International Financial Reporting Standards (IFRS)
This Standards help reduced guesswork and creative accounting.
(f) Development of the Conceptual Framework
Too many rules created confusion. A framework was developed to explain:
* Objectives of financial reporting
* Elements of financial statements
* Measurement bases
This ensures standards are logical and consistent.
CONVENTIONAL PRACTICES IN ACCOUNTING
Accounting conventions are generally accepted practices adopted to solve practical accounting problems
where no strict rule [Link] are not laws but are widely accepted due to long usage.
Major Accounting Conventions
(a) Substance over form convention: This hold that accounting should show all transactions in
accordance with their real substance and economic reality not merely their legal form. For example, if a
business man buys a piece of machinery on hire purchase with an agreement to make instalment
payments in that respect over a period of time, the machinery does not become a legal property of the
business until the payment have been completed. However, the substance over form convention implies
that since the transaction affect the economic situation of the business, the business will show the
machinery being bought in its book of account as though it were legally owned by the business, but also
showing separately the amount still owned by it.
(b) Convention of Materiality: Only information that is significant should be disclosed. Insignificant
items may be [Link]: Small stationery expenses are treated as expenses, not assets.
(c) Convention of Objectivity: Accounting records must be based on verifiable [Link]
opinions should be avoided. Example: Recording transactions based on receipts and invoices.
Importance of Accounting Conventions
*Promote uniformity
*Improve reliability
*Reduce bias
*Enhance comparability of financial statements