Topic 9: Accounting Concepts Flashcards
What are the Advantages and Disadvantages of using Accounting Concepts?
ADVANTAGES
Accounting concepts provide a framework for preparing financial statements
Accounting concepts provide a systematic way of preparing financial statements which makes them free from bias and therefore they show true and fair view of the business
Using accounting concepts, the accounting processes are standardized, as at businesses follow the same rules. This means that different businesses’ financial statements can be accurately compared and valid decisions made with confidence.
DISADVANTAGES
Accounting concepts are open to different interpretations e.g. the concept of materiality may be viewed differently and it may well depend on the size of the business revenue. Since different businesses may interpret concepts differently; it will make comparisons less reliable.
What does the accounting concept of Consistency refer to?
Once a business has fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way. i.e. there should be consistent treatment of similar items within each accounting period and from one period to the next. This helps to compare results from year to year and helps decision making. However, it does not mean that the business has to follow the method until the business closes down. A business can change the method used, but such a change is made with a lot of consideration and it is declared in the notes to the accounts.
What does the accounting concept of Prudence refer to?
It is the accountant’s duty to see that people get the proper facts about a business. The accountant should always exercise caution when dealing with uncertainty and ensure that the financial statements are NEUTRAL. It is true that in applying the prudence concept, an accountant will normally make sure that all losses are recorded in the books, but that profits and gains will not be recorded before they should be. Although it emphasizes neutrality, many people feel that the prudence concept means that accountants tend to choose figures that will cause the Profits & Capital/Equity of the business to be shown at a lower amount
What does the accounting concept of Accruals refer to?
it is about matching the correct expenses and incomes to the correct time period therefore calculating the correct profit for the year
What does the accounting concept of Materiality refer to?
Accounting does not serve a useful purpose if the effort of recording
a transaction in a certain way is not worthwhile. I.e. do not waste your time in the
elaborate recording of trivial items. e.g. Buying a box of paperclips would be recorded
as an expense in the period in which it was bought. If some paperclips were still in
use during the next accounting period; it would not be shown as an asset because the
tiny amount involved is not worth an elaborate or complicated entry in the books. It is
NOT MATERIAL. Buying items such as a stapler or hole punch are not included in the
non-current asset section but are included as sundry expenses.
What does the accounting concept of Business Entity refer to?
The affairs of a business are to be treated as being quite
separate from the non-business activities of its owner(s). We do not record in the
business books any of the private affairs of the owner. The only time that the personal
resources of the proprietor(s) affect the accounting records of a business is when they
introduce new capital into the business, or take drawings out.
What does the accounting concept of Money Measurement refer to?
Accounting information is concerned only with those facts
that can be objectively measured in monetary units. Financial records should be
expressed in monetary terms.
This means that accounting can never tell you everything about a business. For
example, accounting does not show whether the firm has good or bad managers or
whether there are serious problems with the workforce. The reason that these or
similar items are not recorded is that it would be impossible to work out a monetary
value for them which most people would agree to.
What does the accounting concept of Going concern refer to?
The concept implies that the business draws its accounts assuming it will continue to operate
for the foreseeable future and carry out its commitments and objectives i.e. expected to close down
