Accouting Concepts Flashcards
Business entity
States the legal separation between the owner of the business and the company. All items used for personal use cannot be placed in the accounts of the business.
The financial statements mustn’t include any personal income, expenditure, assets or liabilities of the owners of the business. Another application of this concept is that ‘capital introduced’ and drawings are shown on the SOFP.
Money measurement
Only transactions and events that could be measured in monetary terms are recognised in the financial statements.
Financial statements should not include items that can’t be expressed in money terms, e.g. employee motivation or the quality of goods and services that’s been produced.
Duality
Every financial transaction has two effects desired as a debit and a credit which are recorded in two separate accounts.
An example of double entry is an application of this concept. The trial balance balance.
Cost
Assets and liabilities are recorded at the historical cost rather than estimating what they are now worth. The only exception is when there’s a valid reason or revaluing NCAs.
NCA are recorded at cost before the provision for depreciation is subtracted. No assets or liabilities adjusted for inflation.
Going concern
The business ,to which the financial statements relate, will continue to operate in the foreseeable future. The NBV of NCA assumes that they will be used for several years. The rate of depreciation would be higher if that wasn’t the case.
Accruals
Cost and revenue match to the time period in which they arose and NOT when they’re paid for. Income and expenses adjusted for prepayments and accruals, cost of sales is adjusted for opening and closing inventory and NCA are depreciated over the life of an asset.
Consistency
Businesses should always use the same accounting treatment for similar transactions. They shouldn’t change accounting policies unless they have a reason to do so.
The same methods and rates of depreciation are consistently applied to all items within a particular category of NCA for example vehicle and equipment.
Prudence
It’s about taking a pessimistic approach. Don’t risk overstating revenue or assets or understating expenses or liabilities. If in doubt include a figure that will cause profit or the value of assets to be lower rather than higher.
Inventory is valued at the lower of cost and net realisable value. Estimates of accruals and prepayments, estimates of lifetime and residual value of assets calculated depreciation. Also recoverable debts and provision for doubtful debts.
Materiality
Some items are not worth recording separately because their low value means that they do not affect decisions taken by the users of the financial statements.
Expense items are grouped together as general expenses or sundries.
Low NCA are treated as an expense on the income statement for example stationary items or small tools that will be used for more than a year
Realisation
Revenue and purchases are recorded at the date when the goods and services are provided and not when the payment is made for them.
Revenue of purchases are included in the income statement even if they are credit transactions and the buyer hasn’t yet paid for them. Another application: treatment of goods sold on a sale or return.
