Core Concepts in Financial Accounting and Asset Valuation

Going Concern

Unless there is evidence that indicates otherwise, the reporting entity is presumed to be capable of operating for the foreseeable future.

Accrual Accounting

The effects of transactions on the elements of the financial statements will be recorded; revenues and expenses are recorded when they are obtained or incurred.

Uniformity

The reporting entity must maintain its application over time and for similar elements of the financial statements, unless there is a sound justification to change.

Prudence

Profits obtained before finishing the year must be recognized, as well as depreciation and impairment.

No Compensation

All elements of the financial statements must be separately valued and recognized.

Materiality

The reporting entity may disregard one or more accounting principles if the impact of that decision does not affect the true and fair view of the financial position of the entity.

Contingent Liability

These are liabilities that may or may not be incurred by an entity depending on the outcome of a future event. These liabilities are recorded in a company's accounts and shown in the balance sheet when both probable and reasonably estimable. A footnote to the balance sheet describes the nature and extent of the contingent liabilities.

Asset Held for Sale

A financial instrument that may be sold, but for which management does not have a specific sale plan. Management is interested in selling the instruments at a profit.

Asset Held to Maturity

Marketable securities representing debt that are expected to be held until the settlement date. Market value is not their most relevant attribute, as management expects to receive their settlement value plus periodic interest payments.

Impairment

A temporary and reversible depreciation of assets below their book value.

Depreciation

The accounting representation of the systematic depreciation of assets as a result of their use or obsolescence over time (irreversible). The purposes of depreciation are:

• To reduce the value of fixed assets on the balance sheet.
• To reflect the expense in the income statement.
• To create reserves for the renovation of assets (tangible or intangible).

Accruals

These appear when revenue or expenses are allocated to the reporting period coming to an end, but cash will be received or paid in the next year, and the company may not yet recognize the right to receive cash or the obligation to pay.

Deferrals

These are recorded when revenue or expenses are to be allocated to the next reporting period, but cash has already been received or paid.