Principle of Relevance (Accounting)

The accounting related party principle is the concept that financial information should be reported in a transparent and unbiased manner in order to give financial statement users an accurate view of the company’s financial position and performance. Related parties are those entities who are related to one another, either directly or indirectly, with respect to the financial statements, as well as those responsible for providing services or selling goods to or from the entity. This principle is important for both the entity preparing the financial statements and the financial statement reader.

In order to comply with the accounting related party principle, an entity should disclose the identity of any related parties, the nature of the relationship, and the terms of the transactions. This disclosure should include the identification of any transactions between related parties, the nature of such transactions (such as renting or leasing a property or providing services to or from the entity) and the amount of the transactions. Additionally, the entity should also disclose the cancelable transactions and the outstanding balances of transacted items. Furthermore, any changes in the terms of the transactions should be disclosed.

The purpose of the accounting related party principle is to ensure the accuracy of financial reporting. Proper disclosure of related party transactions protects the company’s reputation and financial stability by providing an accurate and transparent reporting of their financial position and performance. Similarly, it also protects financial statement users from being misled by incomplete or inaccurate information. Additionally, it enables the entity to monitor the aforementioned transactions and ensure that they are conducted in accordance with applicable regulations.

The following are some examples of related party transactions that must be disclosed in accordance with the accounting related party principle: (1) guarantees and contracts by individuals or companies related to the entity; (2) interests in joint arrangements, such as joint ventures; (3) the sale or purchase of goods or services from or to related parties; (4) the provision of financial or general services to or from related parties; (5) any loans to, or from, related parties; and (6) any pending or potential related party transactions.

The accounting related party principle is an important concept in financial reporting. By complying with this principle, entities can ensure that the financial information they provide is accurate, complete, and transparent, while protecting themselves and their stakeholders from any potential risks of errors or misstatements in the financial statements. Additionally, properly disclosed related party transactions can help organizations evaluate their performance, reduce the risk of unethical transactions, and abide by regulations such as the Sarbanes-Oxley Act. As such, proper observance and compliance with the accounting related party principle is essential to ensure the reliability of financial statements.

The Accounting Concepts and Principles refer to certain guidelines that companies should adhere to when preparing their financial statements. These concepts and principles provide a framework for the preparation of the financial statements and ensure the information is portrayed in a uniform and consistent manner.

The main Accounting Concepts and Principles are the Going Concern, Accrual and Materiality concepts.

The Going Concern concept states that businesses are normally assumed to continue functioning and therefore, their assets and liabilities should be recorded on their financial statements for the going concern value.

The Accrual concept states that revenue and expenses should be recorded in the period in which they are earned or incurred, regardless of when the cash flows.

The Materiality concept requires that material transactions or events should be accounted for in the financial statements and that immaterial items should be ignored.

Other important Accounting Principles include Conservatism, Prudence, Historical Cost and Objectivity.

The Conservatism principle requires that in the case of uncertainty, businesses should make the most prudent estimate and choose a course of action that is most likely to minimize losses.

The Prudence principle requires that businesses should not record anticipated profits or make optimistic assumptions until they are almost certain to materialize.

The Historical Cost principle requires that assets and liabilities should be recorded at their original cost when acquired.

The Objectivity principle requires that financial information should be based on verifiable evidence.

These Accounting Concepts and Principles are essential for producing reliable financial information that can be used to make sound business decisions. They guide companies on how to record, classify and report transactions and events in their financial statements accurately.