Accounting Concepts Flashcards
Matching and accruals basis
Effects of transactions
When are they recognised?
Where are they recorded?
What do we match?
2 examples?
When they occur
In the time period to which they relate
Income with expenses that generate income from that period
Depreciation
Accruals/prepayments
Going concern
What does it state?
2 examples?
When should this assumption be rejected?(3)
Assumes the business will continue for the foreseeable future
Assets shown at net balance value
Depreciation charged over life
If the business may close in the near future
If shortage of cash make almost certain business will have to cease trading
If large part of business will have to close down shortage of cash
Historical concept
What is it?
What’s one problem with this?
What’s the name of this problem?
Assets are shown at cost price
Inflation may mean current value is greater than original value
Stability of currency concept
Money measurement concept
What is it?
Accounts only concerned with facts that can be measured in monetary terms
Business entity concept
What is it?
Example?
Affairs of the business kept separate from non-business activities of the owner
Capital and drawings
Dual aspect concept
What is it concerned with?
What is it recorded in?
Assets and claims against them
Double entry bookkeeping system
Time interval/periodicity concept
What is it?
Financial statements are prepared at regular intervals usually annually
Prudence/realisation concept When is income/profit recognised? When are expenses recognised? What are 2 examples? What criteria must be recognised for realisation to occur? When not realised?(2) What should not be done to gains or loses? When are profits recognised?
What it is realised
When it is known about
Writing off bad debts
Value stock at lower cost or net realisable value
Received goods/services
Buyer accepts liability to pay
Monetary value established
Buyer in position to pay
When order received
When customer pays for goods
Overstated or understated
Upon sales
Consistency concept
What is it?
When?
2 examples?
Consistency in treatment of accounts
Within period and between periods
Use same rates and methods of depreciation
Use same stock recording method
Materiality concept
What is it?
What are examples?(3)
If the omission or misstatement of an item will influence users of the accounts
Estimated bad debt provision
Estimated stock write offs
Estimated accruals
What are the 4 qualitative characteristics?
Relevancy, reliability, comparability, understandability
What is the relevance characteristic?
What is the reliability characteristic?
What is the comparability characteristic?
What is the understandable characteristic?
Info must have the ability to influence decision making
Must be free from bias and material errors and depended upon to be faithful representation
Consistency over time and between companies
Policies chosen to enable ease of understanding
What are the 3 constraints?
Time
Balance between profits
Balance between characteristics
