Consistency generally requires that a company use the same accounting

Consistency generally requires that a company use the

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Consistency generally requires that a company use the same accounting principles and reporting practices through time. This concept prohibits indiscriminate switching of accounting principles or methods, such as changing inventory methods every year. However, consistency does not prohibit a change in accounting principles if the information needs of financial statement users are better served by the change. When a company makes a change in accounting principles, it must make the following disclosures in the financial statements: (1) nature of the change; (2) reasons for the change; (3) effect of the change on current net income, if significant; and (4) cumulative effect of the change on past income. Chapter 2 introduced the basic accounting concept of the double-entry method of recording transactions. Under the double-entry approach, every transaction has a two-sided effect on each party engaging in the transaction. Thus, to record a transaction, each party debits at least one account and credits at least one account. The total debits equal the total credits in each journal entry. When learning how to prepare work sheets in Chapter 4, you learned that financial statements are fundamentally related and articulate (interact) with each other. For example, we carry the amount of net income from the income statement to the statement of retained earnings. Then we carry the ending balance on the statement of retained earnings to the balance sheet to bring total assets and total equities into balance.
In Exhibit 27 we summarize the underlying assumptions or concepts. The next section discusses the measurement process used in accounting. The measurement process in accounting Earlier, we defined accounting as "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information". 3 In this section, we focus on the measurement process of accounting. Accountants measure a business entity's assets, liabilities, and stockholders' equity and any changes that occur in them. By assigning the effects of these changes to particular time periods (periodicity), they can find the net income or net loss of the accounting entity for those periods. Accountants measure the various assets of a business in different ways. They measure cash at its specified amount. Chapter 9 explains how they measure claims to cash, such as accounts receivable, at their expected cash inflows, taking into consideration possible uncollectibles. They measure inventories, prepaid expenses, plant assets, and intangibles at their historical costs (actual amounts paid). After the acquisition date, they carry some items, such as inventory, at the lower-of- cost-or-market value. After the acquisition date, they carry plant assets and intangibles at original cost less accumulated depreciation or amortization. They measure liabilities at the amount of cash that will be paid or the value of services that will be performed to satisfy the liabilities.

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