Accounting Principles

Accounting Principles

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Accounting principles are the generally accepted rules that govern how transactions are recorded, classified, summarised and reported under the Ghana National Accounting Standards (GNAS) and IFRS adopted in Ghana. The foundation is the accounting equation: Assets = Liabilities + Owner’s Equity, which must balance after every double-entry posting. You must know the eleven core principles: Going Concern, Accrual, Prudence, Materiality, Consistency, Comparability, Historical Cost, Business Entity, Money Measurement, Dual Aspect and Accounting Period. High-yield WASSCE pointers: (1) the Accrual concept requires adjustments for outstanding expenses, prepaid expenses, accrued income and income received in advance at period end; (2) Capital expenditure (e.g. machinery) is non-current and not expensed, while revenue expenditure (e.g. repairs) is charged in the income statement; (3) the Prudence concept never justifies deliberate understatement of assets beyond justified provisions.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

The Eleven GNAS Accounting Principles

Principle	Core Meaning
Going Concern	Financial statements assume the business will continue operating indefinitely.
Accrual (Matching)	Revenue and expenses are recognised when incurred, not when cash moves.
Prudence (Conservatism)	Anticipate no profit, provide for all known liabilities and losses.
Materiality	Only information that could influence users’ decisions is separately disclosed.
Consistency	Same accounting method used from one period to the next.
Comparability	Information must be comparable across periods and with other entities.
Historical Cost	Assets are recorded at original purchase cost.
Business Entity	Owner is separate from the business; personal transactions stay out.
Money Measurement	Only monetary items in cedis (GH₵) are recorded.
Dual Aspect	Every transaction has equal debit and credit effects (A = L + E).
Accounting Period	Life of a business divided into artificial 12-month periods.

The Accounting Equation and Its Expanded Form

The dual aspect concept is the engine of double entry. Every transaction keeps the equation balanced:

• Assets = Liabilities + Owner’s Equity
• Expanded: Assets = Liabilities + Capital + Revenue − Expenses
• Capital = Assets − Liabilities

Period-End Adjustments (Accrual Concept in Action)

To convert trial balance figures into a true Trading, Profit and Loss Account and Balance Sheet, the following adjustments are made:

1. Accrued (outstanding) expenses — debit expense, credit accrued expense (liability).
2. Prepaid expenses — credit expense, debit prepayment (asset).
3. Accrued (outstanding) income — debit accrued income (asset), credit income.
4. Income received in advance — credit income, debit prepayment.
5. Depreciation — debit P&L, credit accumulated depreciation (contra-asset).
6. Provision for doubtful debts — debit P&L, credit provision (deduction from receivables).

Distinction Between Capital and Revenue

• Capital expenditure (e.g. purchase of delivery van, GH₵25,000) is recorded as a non-current asset and depreciated.
• Revenue expenditure (e.g. fuel, repairs of that van, GH₵800) is charged to the Profit and Loss Account in the period incurred.
• Capital receipts (e.g. loan from bank) go to the Balance Sheet; revenue receipts (e.g. cash sales) go to the Trading Account.

Typical WASSCE Question Patterns

Paper 1 (Multiple Choice, 30 marks) and Paper 2 (Theory & Practical) frequently test:

• “Which principle is violated when…?” scenarios.
• Journal entries for period-end adjustments.
• Computation of revised profit from the formula: Profit = Closing Capital − Opening Capital − Additional Capital Introduced + Drawings.
• Identification of items as capital or revenue expenditure/receipts.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Connections, Edge Cases and Common Traps

The Prudence concept is regularly misused. It permits creating a provision for doubtful debts because some receivables may not pay, but it does not authorise creating hidden reserves by deliberately undervaluing stock below cost. The correct test is: is there objective evidence of a present obligation or impairment? WASSCE examiners test this by giving a scenario where a business writes down a brand-new asset by 30% “to be safe”; the correct answer identifies this as a violation of Historical Cost and Faithful Representation, not an application of prudence.

Consistency vs. comparability: A business can change its stock valuation method (FIFO to AVCO) only if it can demonstrate the new method gives more reliable and relevant information, and the change must be disclosed in the notes to the accounts. A silent switch is a violation.

Substance over form is the modern override: a leased asset used by the business like its own should be capitalised (IFRS 16). For WASSCE level, recognise it as the principle that economic reality trumps legal form.

Worked example (WASSCE-style): Kofi started business on 1 January 2024 with GH₵40,000 cash. During the year he introduced extra capital of GH₵10,000 and withdrew GH₵6,000 for personal use. On 31 December 2024, total assets were GH₵90,000 and external liabilities GH₵52,000. Compute profit.

• Closing Capital = Assets − Liabilities = 90,000 − 52,000 = GH₵38,000.
• Profit = Closing Capital − Opening Capital − Additional Capital + Drawings = 38,000 − 40,000 − 10,000 + 6,000 = GH₵(6,000) — a loss of GH₵6,000.

Common Mistakes Examiners Exploit

1. Treating drawings as a business expense (it is not — it reduces capital, not profit).
2. Adding loan repayments to expenses (only the interest is an expense; the principal is a liability reduction).
3. Forgetting that bad debts recovered go to the P&L, while the original provision movement must be split: increase = debit P&L; decrease (excess) = credit P&L.
4. Mixing the owner’s personal rent with the business’s rent — that violates the Business Entity concept.

Two Practice Prompts

1. Scenario: Ama, a sole trader, paid GH₵3,600 on 1 October 2024 for a one-year insurance policy covering 1 October 2024 to 30 September 2025. Her year ends 31 December 2024. Show the adjusting entry and state the amount to be charged to the P&L.
2. Theory: The manager of a firm changes the depreciation method from straight-line to reducing balance, citing “better matching”, and does not disclose this in the accounts. Identify the principle violated and explain why disclosure matters for users of the financial statements.

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