Accounting Concepts Flashcards
How is prudence applied to inventory valuation?
Value goods at the lower of cost or NRV
Define ‘cost’ in relation to the cost of inventory
cost of purchases AND getting goods to current location and condition (I delivery and installation)
Goods costing £500 are damaged & can now be sold for £600 after repairs of £40. What value?
500… lower of cost or NRV… NRV is 560 but cost is less at 500
What does NRV stand for and what does it mean?
Net Realisable Value - Selling price minus cost of getting into saleable condition
(e.g. repairs and marketing)
What does Objectivity mean?
Use factual information… no subjectivity or bias
What does the Cost concept state?
Assets should be value at (historic) cost - what they were bought for as it is objective and verifiable
What is meant by going concern? How does this impact the accounts?
The business will continue to operate for the forseeable future… therefore value assets at cost
What do Objectivity, Cost and Going Concern concepts all have in common?
value assets at cost - factual, verifiable, business going to continue
What does the prudence concept state?
Where there is doubt, assets and income should be undervalued, whereas expenses and laibilities should be overvalued
What does the consistency concept state?
Use the same methods for dealing with accounting problems year-on-year. Only change if new value is more accurate
Why is the consistency concept important?
need to know if change in performance is due to business practices or simply changing accounting practices
What does the business entity concept state?
all items in financial statements relate to the business and should not contain personal financial info
A Smith has a company car & uses it Mon-Fri for work. Apply the business entity concept here.
adjust motor expenses for 5/7 (?) of the amount for income statement
What does the money measurement concept state?
a business should only record an accounting transaction if it can be expressed in terms of money
Which concept states that every transaction has 2 effects… a DR and a CR?
Duality
How does the accruals concept deal with income and expenditure?
recorded in period earned (or incurred) not when received (or paid)
Where does accrued income appear in the financial statements?
Current Assets
Where does prepaid income appear in the financial statements?
Current Liabilities
How does the Materiality concept apply to paper clips?
They are not a significant value so should not be recorded as NCA… instead record as expense
How does the Realisation concept apply to goods bought on a sale or return basis?
Should not be recorded as sale until confirmed… if stock had been adjusted it should be added back in
