ROLE OF ACCOUNTING CONCEPTS AND CONVENTION IN FINANCIAL REPORTING

ROLE OF ACCOUNTING CONCEPTS AND CONVENTION IN FINANCIAL REPORTING

CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY

Every business organization whether in the public or private sector is established to achieve certain objectives. This could be profit maximization as in the case of the private sector or efficient and timely provision of essential services at a reduced price, as in the case of the public
sector.
The performance of such business organization has to be reported in monetary terms to the owners of the business. (For example, shareholders in the case
of private organization or the government as in the case of public)
Accountancy plays a vital role in the stewardship of an organization. Accounting has been defined as the process of recording, classifying, reporting and interpreting the financial data of an organization. While it is important for the accountant to have a sound knowledge of this phase of accounting process, it is one a relatively minor part of his total attention to the management reporting and interpretation of the meaningful implication of the data. (Welgenbad and Dittrich 1973:4)
Accounting is therefore basically regarded as a language of communication in an organization like every system of communication; its main purpose is to give different
types of information to interested persons. Because of this main purpose, accounting forms a major part of the total information system in any entity, be it business or non-business. (Inanga 1983)
However, the following problems are encountered in the process of communicating this information.
1. As the information needs of these various groups do not tally, there are conflicts of interest among the various users of financial statements.
2. The problem of subjectivity in preparing the financial statements. Thus, it becomes necessary that in preparing the financial statement, the accountant
be guided by some basic assumptions, principles, concepts and conventions in other to ensure a high degree of standardization in financial reporting.
3. Financial accounting involves the accumulation of historical records which is technically referred to as stewardship accounting. These historical records
for the embodiment of financial statement. Financial statements are the means of communicating to understand parties’ information on the resources,
obligations and performance of the reporting entity. (SAS2).In preparation of these financial statements, certain assumptions, concepts, conventions
and principles which provide the essential framework for expressing accounting information are used. This include:-
1. The money measurement concept
2. The going concern concept
3. The realization concept
4. The dual aspect concept
5. The accruals concept
6. Prudence concept
7. Consistency concept (Frame word 1998:82-85)
These accounting concepts and conventions are seldom disclosed on the financial statement because they are generally accepted as being the undertaking
of periodic preparation and presentation of financial statement; but, if in preparation and presentation of this financial statement, the fundamental concepts
and conventions are not followed, problems will arise in analysis, interpreting and reporting financial statements. It is therefore essential for the understanding that the interpretation and meaningful analysis of financial statement that these basic concepts, assumptions, principles and conventions used in the preparation must be constantly borne in mind.

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ROLE OF ACCOUNTING CONCEPTS AND CONVENTION IN FINANCIAL REPORTING