Accounting Concepts and Recording Accounting Transactions

Question 1

the need for accounting concepts: the origins of accounting regulation…

Answer 1

• should ensure a standard approach for the prep of financial statement
• accounting procedures + methods used should always be done in the same way
• accounting info must be presented in a standardised format to facilitate internal comparison over time and external comparison with other companies
• should result in financial statements that will present a ‘true and fair’ view

Question 2

fundamental accounting concepts: accruals concept

Answer 2

• match income with associated expenditure
• account for transactions in the period when they are incurred
• regardless of when the cash in transferred/received the transaction must be listed when the agreement takes place, not when the cash changes hands

Question 3

fundamental accounting concepts: going concern

Answer 3

• financial statements are usually prepared on the assumption that the company will continue in operational existence for the foreseeable future (at least next 12 months)
• assumed that the entity does not have the intention nor the need to liquidate or cease to trade

Question 4

fundamental accounting concepts: prudence

Answer 4

• do not recognise income until it is reasonably certain you will recieve it
• however, record all costs as soon as you know that you have incurred them (e.g. if electricity is used but don’t pay the bill until next year the cost should still be recorded this year)

Question 5

fundamental accounting concepts: disaggregation

Answer 5

• material assets and liabilities should normally be disclosed separately rather than being ‘netted off’ against each other
• must show all assets, liabilities, income and expenditure in full

Question 6

fundamental accounting concepts: materiality

Answer 6

• means omissions or misstatements of items are material if they could influence the decisions users make based on the financial statements
• depends on the nature and the size of the item or the error (e.g. an omission of a building from total assets would influence decision making)
• the relevance of info is affected by its materiality