The Theoretical concepts of accounting

Concept: Determine the specific meaning of a particular component by extracting the essential characteristics and its relationship to other elements

Are statement of axioms that portray the nature of entities operating in a free economy . The nature of the entity and the interests in the entity may be classified according to the:

1- The propriety theory.2-The entity theory.3-The residual equity theory.

The Theoretical concepts of accounting

4- The enterprise theory.

5- The fund theory.

These are also called theories explaining equity.

Three main theoretical concepts of accounting that always been practice:

propriety theory

entity theory

fund theory

The proprietary theory

The proprietary theory adapts best to sole proprietorship and partnership , though corporations are also influenced by this theory to some extent.

Proprietor group as the center of interest which accounting records are kept and financial statement are prepared.

Directed to serve the owners and maximize their profits.

The proprietary theory

Is the determination and analysis of the proprietor’s net worthAccounting equation is ;ASSETS-LIABILITIES=PROPRIETOR’S (owners) EQUITY More assets center and balance sheet oriented.Net income (Revenue – Expenses ) is the change in owners’ equity during a given period.

Assets are rights to the entity, consist of liabilities and stockholder’s equity-In corporation-.

Income is property of entity until it is distributed as dividends

More “income centered” and concentrate more to Income Statement

The proprietary theory

The entity theory adapts best to Cooperation's. Entity is separate and distinct from those who provide capitalBusiness unit owns the resources of the enterprise and is liable to claim of the owner and the creditors.Directed to serve the stockholders and creditors , to maximize their profits.

The entity theory

Net income dose not belong to the proprietor (owners) , but to the entity.

Accounting equation is;ASSETS= EQUITIES

ASSETS=LIABILITIES + STOCKHOLDER’S EQUITY

The entity theory

Basis of accounting ,neither the proprietor nor the entity as separate person, is on group of assets and related obligations and restrictions.

Business (accounting) unit as consisting of economic resources (funds) and related obligations/restrictions regarding the use of the resources.

Accounting equation;ASSETS = RESTRICTION (obligations) OF ASSETS

The fund theory

More asset center and consider statement of sources and uses of funds.

Primarily to government and nonprofit organizations

The fund theory

Basic Accounting Principles

Are general rules which govern the development of accounting techniques.

• indicate how transactions and other economic events should be recorded.

1- The revenue principle.2- The cost Principle.3- The matching.4- The objectivity principle.5- The full disclosure principle.

The cost principle

Acquisition cost or historical cost is the appropriate valuation basis for recognition of the acquisition of all goods and services, expenses costs, and equities. “cost is the amount,measured in money, of cash expended or other property transferred, capital stock issued, services performed, or a liability, incurred, in consideration of goods or services received or to be received.”

Cost = exchange price of or the monetary value given for the acquisition of goods or services. Justified with objectivity and going-concern postulatedisadvantage of unit-of measure postulate, that assumes purchasing power of the dollar is stable.

The cost principle

The revenue principleThe revenue principle specifies:

1. the nature and components of revenue

2. the measurement of revenue

3. the timing of revenue recognition

The revenue principle

An inflow of cash and other items resulting from the sale of goods or services

A product of the firm resulting from the mere creation of goods or services by an enterprise during a given period of time

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