1. INFORMATION ABOUT REPORTING ENTITY
1.1. Information about a reporting entity’s economic resources and claims, and changes in its economic resources and claims, during a period, provides a better basis for assessing the entity’s past and future performance, than information solely about cash receipts and payments during that period. Therefore, accrual accounting is applied in financial reports.
2. ACCRUAL ACCOUNTING
2.1. Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those occur, even if the resulting cash receipts and payments occur in a different period.
2.2. Therefore according to accrual accounting, the effect of transactions that are incurred on credit, are recorded in the accounting records when the transaction or event is incurred and not only at that point in time when the cash is received or paid.
2.3. Thus, the statement of profit or loss, the statement of changes in equity and the statement of financial position are prepared from accounting records in which the effect of transactions and events are, where applicable, are prepared in accordance with accrual accounting
3. OBJECTIVE
3.1. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to users (existing and potential investors, lenders and other creditors) in making decisions relating to providing resources to the entity
3.1.1. (1) These decisions involve decisions on buying, selling or holding equity and debt instruments; providing or settling loans and other forms of credit; or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.
3.1.2. (2) In addition, these decisions depend on the returns that the potential investors, lenders and other creditors expect from their investment. For example dividends or interest payments.
3.1.3. (3) Expectations about returns are based on assessment of the amount, timing and uncertainty of future net cash inflows to the entity as well as an assessment of management’s stewardship of the entity’s economic resources.
3.1.4. (4) Thus, existing and potential investors, lenders and other creditors need information that will help them to make these assessments.
3.2. Information needed on:
3.2.1. (1) The economic resources of the entity
3.2.2. (2) The claims against the entity (financial position)
3.2.3. (3) As well as changes in those resources and claims (resulting from the entity’s financial performance or other events (such as issuing debt or equity instruments).
3.2.4. (4) Information is also needed on how efficiently and effectively the entity’s management have discharged their responsibilities to use the entity’s economic resources.