Accounting concepts used in the preparation of accounting records Flashcards
What are the general accounting concepts?
Money measurement
Duality
Going concern
Cost
Accruals
Consistency
Prudence
Materiality
Realisation
Business entity
What is business entity?
Financial statement records and reports on the activities of a business must be kept separate from the assets and liabilities who play are part owning or running the business
What is money measurement?
Money must be the common denominator in recording and reporting business transactions so things that don’t have a monetary value should not be included
What is an example of money measurement?
The loyalty of a workforce doesn’t have a value
What is materiality?
When some items have such a low monetary value that it is not worthwhile recording them separately
What are some examples of materiality?
Small expenses such as purchasing office plants and window cleaning might be grouped together as sundry expenses
What is COST?
Assets and liabilities are recorded in the financial statements at historical cost (amount of the transaction involved)
What is the benefit of COST?
Statement of financial position valuations are objective and there can be no dispute about the amount shown
When does COSt become less effective?
As time passes and the original cost goes out of date so regular revaluations should occur for a more up to date valuation
What is GOING CONCERN?
The income statement and statement of financial position are prepared on the basis that there is no intention to reduce significantly the size of the business or to liquidate the business
What is an example of going concern?
A large purpose built factory will have considerable value to a going concern business but if the factory has to be sold it will likely has limited use and therefore a lower market value
what is the accrual concept?
Expenses and income for goods and services are matched to the same time period
What are some examples of the accruals concept?
Trade receivables
Trade payables
Depreciation of non-current assets
Irrecoverable debts written off
Provision for doubtful debts
Opening and closing inventory adjustments
What is the consistency concept?
Requires that when a business adopts particular accounting policies it should continue to use such policies consistently
What is an example of using consistency?
Assets are depreciated using straight-line depreciation at x% so this method should continue to be used
What areas of a business will need to be consistent?
Inventory valuation
Provision for doubtful debts
Application of materiality concept
Treatment of capital and revenue expenditure
What is the prudence concept?
Caution is exercised when making judgements under conditions of uncertainty
When there any doubt be conservative with profit and asset valuation figures
What are some examples of the use of the prudence concept?
Accrual of expense and income were an estimate is made of the amount
Prepayment of expense and income where amount is estimated
Inventory valuation
Deprecation of non-current assets
Irrecoverable debts written off
Provision for doubtful debts
What is the realisation concept?
Business transactions are recorded in the financial statements when the legal title passes between the buyer and the seller might not be at the same time as payment
What is an example of a realisation?
Credit sales are recorded when the sale is made but payment will be made at a later date
What is the duality concept?
Each financial transaction is recorded by means of two opposite accounting entries (debit and credit) but of equal values
Double entry
