Accounting concepts Flashcards
explain the need for accounts to achieve a ‘true and fair’ view of the business
It can satisfy external stakeholders of a business and it allows the business to set targets and therefore achieve objectives.
What are the accounting conventions (principles)?
- Consistency
- Going concern
- Matching (accruals)
- Materiality
- Objectivity
- Prudence (conservatism)
- Realisation
What is consistency?
All accounts produced in the same way + business should have policy for the formulation of its accounts.
What is going concern?
Assumes business is operating as normal and that there is no reason not to expect it to operate as normal in the foreseeable future.
What is Matching (accruals)?
Timing of information put into accounts.
The dates used to record financial transactions are those when the transactions occurred NOT when the actual payment is made.
What is materiality?
Concerned with the big picture.
Calculating value of business requires a realistic figure to be reached.
Wouldn’t spend time calculating every single asset if it is of little/no value and would not make a real (material) difference to balance sheet or profit and loss account.
what is objectivity?
Idea that accounts must be realistic and based on facts not opinions or guesses.
Bias must be avoided.
Real value of assets must be listed.
Doesn’t use optimism.
What is prudence (conservatism)?
Similar to objectivity, not overstating the financial situation.
Appropriate to take a pessimistic view.
Where there are uncertainties, the principle suggests it is right to understate level of profit and overstate level of losses.
What is realisation?
Similar to matching, takes place when legal ownership changes hands and not when payment is made.
Goods/services are ‘realised’ (become property) when any legal entitlement is exchanged.
explain the need to comply with Generally Accepted Accounting Practice (GAAP)
Allows stakeholders to make comparisons of accounts on the basis that the businesses all use the same set of principles in the manner which accounts are formulated + presented.
