Recognition in Financial Statements

Table of Content

In Chapter 3, the elements of financial statements are defined. The Statement of Principles now focuses on their recognition. It is important to only recognize items that meet these definitions, as not every eligible item should be recognized. Recognition is crucial because creative accounting often involves recognizing non-assets as assets. Recognition involves describing the element in words and assigning a monetary value, which is then included in the statement totals. The financial statement’s notes provide important information about recognized and unrecognized elements. However, disclosing in a note cannot replace the proper recognition of eligible elements.

The recognition of assets and liabilities involves three stages: initial recognition, subsequent remeasurement, and derecognition. Items are initially recognized when they are incorporated into financial statements for the first time. Subsequent remeasurement refers to changing the monetary amount at which a previously recognized item is recorded. Derecognition involves removing a previously recognized item from the financial statements.

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To be recognized, an element must meet two criteria. Firstly, there must be sufficient evidence that a change in assets or liabilities inherent in the element has occurred. This includes evidence of future inflow or outflow of benefits when applicable. Secondly, the element must be measurable at a monetary amount that is sufficiently reliable.

The recognition of a change in recording an asset or liability depends on two factors: sufficient evidence that the amount has changed and the ability to measure the new amount reliably. If there is no longer enough evidence that an entity has access to future economic benefits or an obligation to transfer benefits, the asset or liability should no longer be recognized. If there is a change in total assets that is not offset by an equal change in total liabilities or a transaction with owners, a gain or loss will occur. These gains and losses should be recognized in either the profit and loss account or the statement of total recognized gains and losses. Contributions from owners and distributions to owners should be directly recognized in ownership interest and not reflected in either performance statement.

SSAP 2, issued in November 1971 and amended in November 1997 and December 1998, is dedicated to enhancing the understanding and interpretation of financial accounts. It emphasizes the importance of being aware of the key assumptions underlying the accounts. The objective of SSAP 2 is to improve the quality of financial information disclosed by establishing clear explanations of the accounting policies followed in the financial accounts. These explanations should be significant in presenting a true and fair view. It is important to note that SSAP 2 does not establish accounting standards for individual items, which are addressed in separate accounting standards (Statements of Standard Accounting Practice and Financial Reporting Standards) issued periodically.

SSAP 2 establishes four key accounting principles: The concept of ‘going concern’ which assumes the enterprise will continue to operate in the foreseeable future. The concept of ‘accruals’ which recognizes revenue and costs as they are earned or incurred, rather than when money is received or paid. These items are matched with each other as much as possible and are included in the profit and loss account for the relevant period. In situations where the accruals concept conflicts with the principle of ‘prudence’, the principle of prudence takes precedence.

The ‘consistency’ concept refers to ensuring consistent accounting treatment for similar items within each accounting period and from one period to another. Similarly, the concept of ‘prudence’ entails that revenue and profits should not be anticipated but rather included in the profit and loss account only after they are realized either in cash or in other assets whose eventual cash realization can be reasonably certain. All known liabilities, including expenses and losses, are accounted for, regardless of whether the amount is known with reasonable certainty or estimated based on the available information.

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Recognition in Financial Statements. (2018, Jul 08). Retrieved from

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