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relevant to the decision-making needs of allowance should be made for all known
the users. Materiality is a relative concept expenses and losses whether the amount
depending with the size and particular is known for certain or just an estimation.
circumstances of individual companies By doing so, all business expenses and
under consideration. liabilities will not be understated in the
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Full disclosure books of accounts. It is based on the policy
A convention of full disclosure requires that, of playing safe in regard to showing profit –
all material and relevant facts concerning never overstate profit.
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financial statements should be fully Doing so, may lead to distribution of
disclosed. Full disclosure means that, there dividend out of capital, which is not a fair
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should be full, fair and adequate disclosure policy as it will lead to the reduction in
of accounting information. Adequate the capital of the business. Based on
means sufficient set of information to be this convention, profit should not be
disclosed. Fair indicates an equitable recorded until it is realised and any loss
treatment of users. Full refers to complete that is anticipated in the near future should
and detailed presentation of information. be provided for. A good example on this
Thus, full disclosure suggests that, every includes, valuation of inventory whereby
financial statement should fully disclose closing inventory is supposed to be valued
all relevant information for all interested at cost or net realisable value, whichever
parties like investors, lenders, creditors is lower. Similarly, it is important to create
and shareholders to see. This is important provision/allowance for doubtful debts,
because, shareholders would like to know discount on debtors, writing off intangible
profitability of the firm while the creditors assets like goodwill and patents. The
would like to know the solvency of the convention of conservatism is a very useful
business. In the same way, other parties tool in situation of uncertainty and doubts.
would be interested in the financial Accounting concepts
information according to their requirements.
This is possible if financial statements Accounting concepts are the general rules
disclose all relevant information in full, and assumptions established by accounting
bodies to guide the recording of business
fair and adequate manner.
transactions and preparation of financial
Conservatism statements. They include the following:
Conservatism or prudence convention is business entity, accrual basis of accounting,
based on the principle that, one should going concern, money measurement,
anticipate no profit, but provide for all accounting cost, dual aspect of accounting,
possible losses. When recording transactions accounting period, realisation and matching
in the books of accounts, assets and income concept.
are not to be overstated and provision/

Student’s Book Form Five
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