Financial accounting

Author: / Country: Mainland China
Publisher:
Publishing Date: 2003-06-01
Features: The accounting period has a significant impact on the selection of accounting principles and policies. Due to the accounting period, the difference between the current period and other periods arises, leading to the distinction between the accrual basis and the cash basis, and subsequently giving rise to accounting methods such as accounts receivable, accounts payable, deferrals, accruals, and prepayments. Common accounting periods are one year, with an accounting period determined by one year referred to as the fiscal year, and financial statements prepared on an annual basis are also known as annual reports. In China, the fiscal year runs from January 1 to December 31 of the Gregorian calendar. To meet the needs of people for accounting information, enterprises are also required to prepare financial reports for periods shorter than a year, such as requiring listed companies to provide semi-annual reports.
4. Monetary Measurement
Monetary measurement refers to the use of money as the measurement unit to record and reflect a company's production and business activities. Accounting provides a comprehensive and systematic reflection of a company's financial position and operating results. Under market economy conditions, a company's economic activities ultimately manifest as monetary quantities. Therefore, a unified measure like money is needed. However, in enterprises, there are many key success factors that cannot be measured in monetary terms, such as business strategies, market share, product quality, customer satisfaction, and growth opportunities. To compensate for the limitations of monetary measurement, enterprises are required to adopt non-monetary indicators as supplementary information for financial statements. In China, the RMB is required to be used as the accounting basis currency. At the same time, it is stipulated that if a unit's business income and expenses are primarily in a currency other than the RMB, it may select one of those currencies as the accounting basis currency, but the financial statements prepared must be translated into RMB for reflection. Foreign enterprises preparing financial statements for domestic authorities must also be translated into RMB for reflection.
1.4.2 General Principles of Accounting
General principles of accounting refer to the guiding ideology for conducting accounting and the standards for measuring the success or failure of accounting work. They specifically include three aspects: general principles for measuring the quality of accounting information, general principles for recognition and measurement, and general principles for modifying the above principles.
1. General Principles for Measuring the Quality of Accounting Information
The quality of accounting information is the standard for evaluating the success or failure of accounting work. The main standards for evaluating the quality of accounting information include objectivity, relevance, comparability, consistency, timeliness, and clarity.
(1) Objectivity. The principle of objectivity requires that accounting be based on actual economic transactions and legal vouchers as evidence, reflecting the financial position and operating results truthfully, ensuring content accuracy, reliable data, and no significant errors or biases. Reliable accounting information should be verifiable to confirm its authenticity. Objectivity is a fundamental requirement for accounting work. The information provided by accounting work is an important source for users of financial statements and is a crucial basis for economic decisions, including investors. If accounting information cannot accurately reflect a company's actual situation, it may mislead users of accounting information and even lead to errors in economic decisions, rendering the existence of accounting work meaningless. For example, if a company purchases inventory for 2,500 yuan and its value declines by the end of the accounting period, with a replacement cost of 20,000 yuan, the company must record a 5,000 yuan inventory write-down under the lower of cost or market method. If the company's management believes the appropriate value of the inventory should be 22,000 yuan and records it accordingly, both total assets and owner's equity on the balance sheet will be overestimated, and profits on the income statement will also be overestimated. It is clear that accounting information that is not based on objective facts but is instead biased for a specific purpose is unreliable. In the above example, to find reliable inventory value data, management can obtain current price lists from suppliers or hire external professional appraisers to reassess the inventory. Evidence obtained from outside the company is more likely to form reliable, verifiable information. The principle of objectivity applies to all financial accounting information—from assets or equity on the balance sheet to revenue or net profit on the income statement.
(2) Relevance. The principle of relevance requires that accounting information meet the needs of various stakeholders and be helpful in decision-making. If the provided accounting information has no role in economic decision-making, it is not relevant. Therefore, in evaluating the quality of accounting information, in addition to whether it is objective and truthful, it must also be assessed whether the information provided meets the needs of relevant stakeholders. According to the principle of relevance, during the process of collecting, processing, handling, and providing accounting information, accounting work should consider the information needs of various stakeholders and meet their common information needs.
(3) Comparability. The principle of comparability refers to the consistency of accounting information across different companies, making it mutually comparable. The principle of comparability has two requirements. First, accounting information between different companies should be comparable. Second, the financial statements of a company for different accounting periods must also be comparable. Accounting standards emphasize comparability to enable investors and creditors to make comparisons between companies and across different accounting periods. The standardization of financial statement formats promotes comparability. Using the same terminology to describe financial statement elements (assets, liabilities, revenue, etc.) also helps increase comparability. In practice, even in companies that follow standard formats and terminology, information cannot be absolutely comparable. This is because accounting standards allow for several different rules and procedures for handling the same accounting matters, and companies can choose among them, such as inventory valuation methods, depreciation methods, and the recognition methods for gains from investments in others. Comparing companies that use different inventory valuation methods (such as the last-in, first-out or first-in, first-out method) can be very difficult. The principle of comparability also requires that accounting information across different accounting periods of the same company be comparable. To achieve the quality characteristic of consistency, companies must use the same accounting methods in each accounting period. For example, if a company uses the first-in, first-out method to handle inventory and the straight-line method to depreciate assets in one accounting period, it should also use the same methods in the next period. Otherwise, users of financial statements cannot distinguish whether changes in profits and asset values stem from operations or changes in accounting methods.
(4) Consistency. The principle of consistency refers to the requirement that the accounting policies adopted by a company should remain consistent across different accounting periods and should not be changed arbitrarily. Adhering to the principle of consistency makes it possible to compare a company's financial statements across periods. According to the principle of consistency, companies are not allowed to change accounting policies arbitrarily, but this does not mean that the chosen accounting policies cannot be changed at all. Generally, accounting policies can be changed in two cases: first, if relevant regulations change and require companies to alter their accounting policies; second, if changing the accounting policy can more appropriately reflect the company's financial position and operating results. If a company changes accounting policies according to the above principles, it must make appropriate accounting treatments for the change in accounting policies in accordance with national unified accounting systems and disclose the change in the notes to the financial report, including the reasons for the change, the content of the change, and its impact on net profit.
(5) Timeliness. The principle of timeliness requires that accounting information be processed and provided promptly. Accounting information has timeliness. Only accounting information that can meet the needs of economic decision-making in a timely manner has value.