Lecture 3 - Accounting concepts and Recording accounting transactions. Flashcards
The need for accounting concepts: The origins of accounting regulation.
The OOAS: Should ensure a standardised approach for the preparation of financial statements.
Consistency - Accounting procedures and methods used should always be done in the same way.
Comparability - Accounting information must be presented in a standardised format to facilitate both internal and external comparison.
These factors should ensure that financial statements will present a ‘true and fair’ view
Underlying concepts: Measurement rules.
1) Historical Cost Accounting: Recording items that you buy at the price you paid for them.
2) Money measurement concept: Only transactions that can be measured in monetary terms should be included in the financial statements.
What are the 5 Fundamental Accounting Concepts?
1) Accruals concept
2) Going concern
3) Prudence
4) Disaggregation
5) Materiality
What is the Accruals concept (one of the fundamental accounting concepts):
- Referred to as the “matching concept”.
- Match income with the associated expenditure.
- Account for transactions in the period in which they are incurred and NOT when the cash is received or paid.
What is the Going Concern Concept (one of the fundamental accounting concepts):
- Financial statements are normally prepared on the basis that the company will continue in operational existence for the foreseeable future (at least the next 12 months).
- Assuming the entity does not have the intention nor need to liquidate or cease to trade.
- Therefore, this allows companies to record assets and liabilities based on their ongoing operations rather than their liquidation value.
What is the Prudence concept (One of the fundamental accounting concepts):
- Do not recognise income until it is reasonably certain you will receive it.
- However, record all costs as soon as you know that you have incurred them.
What is the Disaggregation concept (one of the fundamental accounting concepts):
- Must show all assets, liabilities, income and expenditure in full.
- Material assets and liabilities should normally be disclosed separately. Rather than being “netted off” against each other.
What is the Materiality concept (one of the fundamental accounting concepts):
Materiality = omissions or misstatements of items are material if they could influence the decisions users make based on the financial statements.
Materiality depends on the nature and the size of the item, or the error.
The relevance of information is affected by it’s materiality.
How inventories are recorded on the statement of financial position:
Unsold purchases are recorded as a current asset on the statement of financial position.
How trade and other receivables are recorded on the statement of financial position:
Money owed for sales is recorded as a current asset on the statement of financial position.
How are trade and other payables recorded on the statement of financial position:
Money owing for purchases is recorded as a current liability on the statement of financial position.
