week 2 Flashcards
qualities of useful information
Materiality
comparability
business entity
historical costs
prudence
going concern
money measurement
accruals matching
Materiality
an item of information is considered material or significant if its omission or misstatement would alter the decision that users make.
Comparability
users of accounting information often want to make comparisons
business entity
nothing private is a business expense. an owner and business are separate entities so the owners personal affairs should not be included
historical cost
put in accounts at price they pay for them. recorded at original purchases price
prudence
cautious never overstate good things (income or assets) and never understate bad things (expenses or liabilities) as don’t want to over inflate account
going concern
assume business can continue to trade for 12 months. if think going bust, can’t have any non-current in account.
money measurement
assets that aren’t shown in account e.g. good rep, well trained staff
Accruals matching
include expense in the year they use it
Accrual
an expense is incurred during the current accounting period but invoice hasn’t been received by the end of the accounting period.
show as current liability on SFP and expense on P or L
prepayment
an expense is paid during the current accounting period (so it’s included in account balance of current period) but not actually used until future accounting period. show as current asset on SFP and deduct amount from expense on P or L
e.g. The owners have provided business capital out of their own private bank accounts.
business entity
e.g. The company has well trained staff
money measurement
e.g. A change is proposed to the method used to value inventories
comparability
e.g. Insurance is paid in advance for next year
accruals matching
e.g. A company is expected to liquidate in the next six months.
going concern
e.g. A customer who owes the company money (a trade receivable – an asset – in the financial statements) is likely to become bankrupt soon. The company has lots of customers.
prudence
depreciation
most non current assets fall in value over time
residual value
two methods
straight line method
reducing balance method
straight line method
original cost
depreciation = original- residual /years
carrying amount
reducing balance method
a fixed percentage is written off carrying amount of assets each year.
original cost
depreciation % X..
carrying amount
which method to use
one closely matches the usage pattern of the asset
e.g. car = reducing balance method
buildings/fixtures= straight line method
