The conceptual framework for financial reporting sets out the concepts that underlie the preparation and presentation of financial statements for users. The objectives of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Users of accounting information are classified into internal and external users.
According to the Framework of IAS/IFRS, the underlying assumptions for the preparation of financial statements are accrual basis and going concern basis.
Required:
d) Explain what is meant by accrual basis of accounting. Illustrate your answer with a suitable example. (2 marks)
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Financial statements are prepared on the basis of recording income and expenditure when they are incurred and not when they are paid for. Expenses should always match the income that generates them. Example: prepayments and accruals.
e) Explain what is meant by going concern basis. (2 marks)
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Financial statement should be prepared on the basis that the entity will continue for the foreseeable future. Example: inventory is valued at lower of cost or net realisable value.