Exam Prep - Accounting concepts and conventions Flashcards
What are the purposes of regulations?
- true and fair view
- required to produce accounting info in an approved format and timescale
What are the sources of accounting rules?
- International Accounting Standards Board
- Company Law
- Financial Conduct Authority
What is the first Accounting Convention?
- Business/Company Entity
What are the concepts of business/company entity?
- Affairs of the business should be kept separately from the owners
- when starting a business, open a separate bank account
What is the second accounting convention?
Historic Cost
What are the concepts of historic cost?
- Assets and liabilities should be recorded at cost
- Not always rigidly adhered to - it can be acceptable to revalue non-current assets
What is the third accounting convention?
Prudence
What are the concepts of prudence?
- accounts should be present least favourable view
- exercise caution when making accounting judgements
- being overly prudent could lead to poor decision making
- lower of cost and net realisable value
What is the fourth accounting convention?
Going concern
What are the concepts of going concern?
- assumption that business will continue for the foreseeable future (usually 12 months)
- if business is not considered a going-concern, accounting rules would have to be changed
What is the fifth accounting convention?
Duel Aspect
What are the concepts of duel aspect?
Every transaction will affect two accounts
What is the sixth accounting convention?
money measurement
What are the concepts of money measurement?
Accounts are restricted to matters which can be measured in money terms
- cannot place a money value on things such as ‘employee loyalty’ so cannot include in accounts
What is the seventh accounting convention?
Consistency
What are the concepts of consistency?
Figures should be comparable from one year to the next
- accounting policies should not change from one year to the next, unless there is a good reason
What is the eighth accounting convention?
Accruals
What are the concepts of accruals?
Costs are accounted for as they are incurred, regardless of when money is paid
What is the ninth accounting convention?
Realisation
What are the concepts of realisation?
Income is recognised as and when it is earned, not when payment is received
- a sale is recorded when made, whether or not the customer pays cash or pays later
What is the tenth accounting convention?
Materiality
What are the concepts of materiality?
Adjustments are only made to ‘material’
