The Theoretical concepts
of accounting
Chapter 5
 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 worth
• Accounting 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.
The proprietary theory
• 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 entity theory
• The entity theory adapts best to
Cooperation's.
• Entity is separate and distinct from those
who provide capital
• Business 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 fund 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
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.”
The cost principle
• Cost = exchange price of or the monetary
value given for the acquisition of goods or
services.
• Justified with objectivity and going-concern
postulate
• disadvantage of unit-of measure postulate,
that assumes purchasing power of the
dollar is stable.
The revenue principle
The 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
We’ll ship the
goods this week.
Thanks for the
order.
• End of Chapter 1
• By: Munawar Hameed