(17)ACCOUNTING PRINCIPLES Flashcards
DEFINE HISTORICAL COST PRINCIPLE
-AN ACCOUNTING PRINCIPLE THAT STATES THAT TRANSACTIONS SHOULD BE RECORDED AT THEIR ACTUAL ORIGINAL COST
DEFINE MONEY MEASUREMENT PRINCIPLE
AN ACCOUNTING PRINCIPLE THAT STATES THAT ONLY TRANSACTIONS THAT CAN BE EXPRESSED IN MONETARY TERMS SHOULD BE RECORDED
DEFINE BUSINESS ENTITY PRINCPILE
AN ACCOUNTING PRINCIPLE THAT STATES THAT THE BUSINESS’ TRANSACTIONS AND THE PRIVATE OWNER’S TRANSACTIONS SHOULD BE KEPT SEPARATE; THEY ARE TWO SEPARATE ENTITIES
DEFINE CONSISTENCY PRINCIPLE
AN ACCOUNTING PRINCINPLE THAT STATES THAT ACCOUNTING INFORMATION MUST ALWAYS BE RECORDED USING THE SAME METHOD
DEFINE DUAL ASPECT PRINCIPLE
DUAL ASPECT PRINCINPLE STATES THAT ACCOUNTING DEALS WITH TWO ASPECTS OF A TRANSACTION; DOUBLE-ENTRY BOOKKEEPING, EVERY DEBIT ENTRY HAS A CREDIT ENTRY OF THE SAME VALUE
DEFINE GOING CONCERN PRINCIPLE
THIS PRINCIPLE STATES THAT A BUSINESS IS SEEN AS A GOING-CONCERN IF IT IS TO CONTINUE FOR THE FORSEEABLE FUTURE
DEFINE MATERIALITY PRINCIPLE
STATES THAT SOMETHING SHOULD ONLY BE INCLUDED IN THE FINANCIAL STATEMENTS IF IT WOULD BE OF INTEREST TO THE STAKEHOLDER
DEFINE ACCRUAL PRINCIPLE
STATES THAT PROFIT SHOULD BE CALCULATED AS THE DIFFERENCE BETWEEN THE INCOME AND EXPENSES INCURRED IN GENERATING THAT INCOME WITHIN A CERTAIN PERIOD, TAKING ACCRUALS AND PREPAYMENTS INTO ACCOUNT
DEFINE PRUDENCE PRINCINPLE
STATES THAT PROFITS SHUOLD NOT BE OVERSTATED (ALLOWED FOR FORSEEABLE LOSSES) AND NON-CURRENT ASSETS SHOULD NOT BE OVER-VALUED
DEFINE REALISATION PRINCIPLE
THIS PRINCIPLE STATES THAT PROFITS (GAINS) CAN ONLY BE SHOWN WHEN IT HAS ACTUALLY BEEN EARNED. REVENUE (INCOME) IS ONLY REALISED WHEN THE LEGAL TITLE TO THE GOODS PASSES FROM SELLER TO THE BUYER
DEFINE SUBSTANCE OVER FORM PRINCIPLE
WHERE THE LEGAL FORM AND REAL SUBSTANCE OF A TRANSACTION DIFFERS. ACCOUNTING SHOULD SHOW THE TRANSACTION ACCORDING TO ITS REAL SUBSTANCE, I.E. HOW THE TRANSACTION AFFECTS THE ECONOMIC SITUATION OF THE BUSINESS
Name areas where money measurement principle cannot be expressed
> Delay in the delivery of goods from suppliers
Workers always fighting at work
Skills and expertise of the employees
Effectiveness and commitment of employees
Explain the importance of consistency principle
Consistency principle makes comparison between years easier reliable and relevant
Name an example of the application of the consistency principle
If the business decides to use the straight line method when charging depreciation on specific non-current assets the Chosen method of depreciation and rate must be kept the same for every financial for that non-current asset and may only be changed on reasonable grounds
Explain how historical cause principle is applied
Historical cost principle is applied when the value of non-current assets shown in the financial records of the business is that of the original cost
Explain how going concern principle is applied when a business is expected to continue for the foreseeable future
Non-current assets are recorded at the historical cost if it is expected that the business will operate for another financial period. However if the business is expected to close down the non-current assets are shown at their book values
Explain the application of accrual matching principle to expenses or income in arrears or due, income received in advance or expenses paid in advance, bad debts, provision for doubtful debts and depreciation
• expenses or income due
> expenses and income due at the end of the current financial period is included in the calculation of the current financial periods profit
• income received in advance expenses paid in advance
> income received or expenses paid in respect the future financial period is not included in the calculation of the current periods profit. Hence, amount relating to future financial period is deducted from the total amount received( or paid) for that income(or expense).
• bad debts
> when you have debts that are written off, it is expected that this loss is recorded in the period when the credit sales took place. In this way, the income (credit sales) is matched with the expense (loss due to bad debts) in the calculation of profit
• provision for doubtful debts
> provision for doubtful deaths is the estimated amount which the business will lose due to possible bad debts. Isn’t dissipated loss should be recorded in the period when the credit sales took place to ensure that income for the period is matched with the expenses of the same period
• depreciation
> depreciation is the estimated loss in value of a non-current acid during a financial period. This value lost is charged as an expense in the same financial. When income (benefits) were earned through the use of this non-current asset
Explain how Prudence principle is applied in depreciation, provision for doubtful debts,and valuing of closing inventory
• depreciation
> charging depreciation as an expense ensures that prophets are not overstated but are of realistic amount based off the total losses incurred by the business during the financial period. The depreciation accumulated on a specific non-current asset (provision for depreciation amount) should be deducted from the cost price to ensure that assets are not overstated.
• provision for doubtful debts
> it is expected that the business takes into account any anticipated loss that the business is likely to incur, one of such losses is due to possible bad debts.
Hence, to ensure that profits are not overstated, the increase in provision is charged as an expense and a decrease in provision is charged as an income.
To ensure that assets are not overstated, the estimated amount of provision for doubtful debt is deducted from the total amount of debtors.
• valuing closing inventory
> high closing inventory overstates profit. Hence, it is expected that the business records the lower value of inventory between the purchase price (cost price) and the net realizable value. And is realizable value is the selling price of an inventory after deducting expenses incurred to get it into a saleable condition.
Explain how realization principle is applied or Illustrated
Dispensable can be illustrated when receive money in advance for goods to be provided in future. This amount must not be recognized as income until the legal title of the goods, risks and ownership have been passed on to the new owner. However, when we saw goods on credit to a customer we recognize the income because the legal title of goods has been passed onto the customer who has an obligation to pay for them.
Explain or illustrate how substance overform principle is applied
This can be illustrated when the business buys a non-current acid on credit or higher purchase. Though legally the assets still belongs to the supplier until it is fully paid for this asset is generating income for the business and should be included as part of the revenue generating assets of the business
Define capital expenditure and given example of one
Money spent to buy or add value to non-current assets in example being buying vehicles buying equipment or extension or improvements of building
Define capital receipts and give an example for each
This is money received from sale of non-current assets an example is sale of vehicles sales of equipment rent income
Define revenue expenditure and given example of one
This is money spent on expenses with the day-to-day running of the business. An example being repairs insurance advertising in any other business expense
