Substance over Form

sum of money everyplace form is an accounting principle expend to ensure that pecuniary statements give a complete, relevant and harmless picture of proceedings and events. If an entity practices the substance over form concept, the financial statements allow borderland the financial reality of the entity (economic substance), rather than the healthy form of proceedings (form)[1]. In accounting for business transactions and other events we round and report the economic impact of an event instead of its sub judice form. Substance over form is critical for reliable financial reporting. It is particularly relevant in case of revenue recognition, bargains agreement and purchase agreements, etc. Examples A lease top executive not withdraw self-will to the leasee just now the leasee has to disk the lease concomitants as an asset if it intends to use it for major portion of its utilizable life or where the present value of lease earnings is fairly commensurat e to the fair value of the asset, etc. Although legitimately the leasee is not the owner, so the leased item is not his asset, but from the perspective of the key political economy the leasee is entitled to the benefits plant in the use of the item and thusly it has to be record as an asset.

A guild is short of cash, so it sells its machinery to the bank and obtains it back on a lease. It is called sale and leaseback. Although the legal ownership has transferred but the underlying economics remain the same and hence under the substance over form principle the sale and subsequent leaseback are considered ane tra nsaction. If two companies swap their invent! ories they will not be allowed to record sales because no sales has occurred even if they have entered into sensible enforceable contracts.( Basic college accounting.com (Jun 20, 2006). Substance over form. Retrieved Jul. 17, 2008.)If you involve to get a broad(a) essay, order it on our website: OrderCustomPaper.com

If you want to get a full essay, visit our page: write my paper