Concepts, Conventions and Definitions - Lecture 3a Flashcards
Accruals concept (matching)
Accounting records events and transactions over continuous successive periods. Income earned or expenditure incurred should be charged to the period to which it relates, and not to any other.
The accruals concept serves to ‘smooth – out’ the cost over the several periods during which the cost is incurred (consumed).
The annual charge against each successive years profits is known as the depreciation charge. This is but one example of ‘accruals’ being implemented.
The consistency concept:
Machinery (and certain other ‘assets’) must be subject to depreciation (that is the original cost gets ‘spread’ across the lifetime of the asset).
Can be done through straight line method or reducing balance method
Each way is known as a basis. When a particular basis is selected by a firm becomes an accounting policy of that firm.
The consistency concept dictates that:
- Accounting policies must be adhered to year-on-year
- Policies should not be changed without good reason
- Such changes must be disclosed to shareholders in the annual report and accounts
Going concern concept
Assuming the business will continue to survive and prosper, unless otherwise is proven.
When the going concern assumption is correct:
the entity is not about to be liquidated.
When the going concern assumption is not correct:
The current marker value would have to be used
The prudence convention
Prudence is the inclusion of a degree of caution in the exercise of judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not over-stated and liabilities or expenses are not understated.
What are the 4 qualitative characteristics of financial statements?
Understandability
Relevance
Reliability
Comparability
Qualitative characteristics - understandability
The info provided should be readily understandable by users having reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence.
Qualitative characteristics - relevance
Information has this characteristic when it influences the economic decisions of users by helping them evaluate past, present or future events or conforming, or correcting their past evaluations
Materiality is considered a sub-attribute of relevance. i.e. it is a threshold point below which relevance does not exist. Information is material if its omission or-mis-statement could influence the economic decisions of users.
Qualitative characteristics - reliability
Information has this characteristic if it is free from material error and bias and can be depended upon to represent faithfully that which it either purports to represent or could reasonably be expected to represent.
Substance over form, neutrality, prudence and completeness are also cited as sub-characteristics of this characteristic.
Comparability
It should be possible to make comparison with previous accounting periods, or with the accounts of different entities (companies). Consequently the users should be informed of the accounting policies employed and of any changes to the policies, and of the effects of such changes.
What is an asset?
“An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to arise”.
What is a tangible asset
When it is physically present and can be touched
what is an intangible asset
No physical presence.
To appear on the balance sheet, it must be identifiable, controlled and the cost of the asset can be measured.
EG - IPR
What is a liability?
“a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits”
