Accounting concepts Flashcards
What is the Accounting/Business Entity Concept?
-The owner of a business is considered to be separate and distinct from the business that he owns
-All accounting transactions are recorded from the VIEWPOINT OF THE BUSINESS. As such, the owner’s personal transactions should NOT be included in the books of the business
-If an owner uses his own money to buy things for his own use, his capital investment in the business is not affected and if he uses the business bank account to buy things for personal consumption, his capital investment is reduced by the amount withdrawn.
What is the Monetary Concept?
-Money is used as the MEASURING UNIT in recording business transactions
- All transactions must be EXPRESSED USING THE SAME CURRENCY WITHIN FINANCIAL STATEMENTS for comparison purposes
- Implies that some important aspects of a business such as the loyalty of the managers or the level of competition faced by the business are not recorded because they are not measurable in terms of money
What is the Accounting period concept?
-Operating life of a business can be divided into SPECIFIC TIME PERIODS (1 year, 6 months, 3 months) to FACILITATE MEANINGFUL REPORTING AND COMPARISON
- Ensures that the information provided is timely for decision making by its users
What is the Matching Concept?
-Expenses should be recognised and RECORDED WHEN THOSE EXPENSES CAN BE MATCHED WITH THE REVENUES THOSE EXPENSES HELPED TO GENERATE FOR A GIVEN ACCOUNTING PERIOD
-In profit determination, revenue must be matched with costs incurred to earn that revenue
What is the Objectivity Concept?
-Accounting information should be independent and supported with unbiased evidence, to ensure relevance and reliability of financial statements
What is the Accrual Concept?
-Income is recognised in the period earned, regardless of whether the cash has been received. Income is usually recognised at the point when goods are delivered or the completion of services
-Expenses are recognised when assets and services are used up regardless of whether they have been paid for
What is the Historical Cost Concept?
-Money values used in accounting should be derived only from factual events
-Assets and services acquired by an enterprise are recorded at the original costs of acquisition
What is the Consistency Concept?
-SIMILAR ACCOUNTING PROCEDURES SHOULD BE USED FOR ITEMS OF SIMILAR NATURE from period to period TO FACILITATE COMPARISON OF FINANCIAL RESULTS AND DECISION-MAKING and GUARD AGAINST MANIPULATION of accounting reports by simply switching to another accounting method that yields more desired results
-Company is permitted to change its accounting methods as long as the change REFLECTS A MORE RELEVANT and FAITHFUL REPRESENTATION of an underlying economic phenomenon and is disclosed to users by way of a footnote in the accounts
What is the Prudence Concept?
Provision should be made for all foreseeable losses but profits should not be recognised until their realisation is reasonably certain
What is the Materiality Concept?
Transactions that have LITTLE EFFECT ON FINANCIAL STATEMENTS may be TREATED IN THE MOST EXPEDIENT MANNER
What is the Going-Concern Concept?
-Financial statements are generally prepared with the ASSUMPTION THAT AN ENTITY WILL REMAIN IN BUSINESS FOR THE FORESEEABLE FUTURE and that it has resources needed to continue operating indefinitely
-If a company is no longer going concern, it must start reporting as such on its financial statements
