Accounting Standards Board (ASB) believes that the statement of principles is a narrative of the fundamental approach underlining the financial statements of all profit oriented businesses.This approach is intended to be up-to-date,consistent internally and should also be in line with all other approaches adopted in the world.Despite the statement of principle assisting in the preparation of the accounting standards,they are also used by preparers and auditors who are faced with new or emerging accounting issues in order to assist them to carry out initial analysis of the issue involved.When reporting the financial position and performance of the firm, the financial statements need to reflect the effect of all transactions of the firm. This can only be achieved by specifying and classifying the items in terms of elements. These elements include:
Gains: This is defined as the increase in the ownership interest. This occurs when the company has made a profit after deducting all the expenses from the sales. For example if a business sells a commodity for 4000 and this commodity had cost it 2500. Then we are told the commodity incurred operating expenses of 300, and then we can say the commodity had a gain of 1200. (Lynn, 2004)Losses: This is defined as a decrease in the ownership interest. This occurs where the business has more expenses than the sale price. For example, if one buys his goods at 1000 and sells them at 1200, we need to deduct the cost price and other operating expenses from the selling price. …
Assets: These are rights or access to future benefits controlled by a business as result of past transactions. These include things like premises, motor vehicles, stock, and cash in hand and at bank. (Lynn, 2004)
Liabilities: This is an obligation to transfer the economic benefit due to past transaction. This is what the firm has in the business that does not actually belong to it but it is borrowed. For example the business might have taken a long from the bank of 10,000 to boost the business. This 10,000 loan is referred to as a liability.
Ownership Interest: This is usually what the owner of the firm has actually contributed to the business. We get it by deducting the entities liabilities from the entities assets.
(Accounting Standards Board, 1999)
The above elements enhance financial reporting because these are elements that are included in the profit and loss account and those to be included in the balance sheet. For example, gains and loss commonly referred to as revenue and expenses respectively are included in the profit and loss account. On the other had the Assets, liabilities and the ownership interest is included in the balance sheet.
(Wood and Sangster, 1999)
Matching is not Regarded as the Driver of the Recognition Process
The above phrase means that the gains or a loss should not be recognised at the same time. If the effect of a transaction was to create a new asset or a liability, then the new asset or liability should not be recognised immediately in the balance sheet once there is reliable evidence of its occurrence which should be in monetary value. Unless there is no change in the net asset or the change is as a result of the capital