Week 2 Flashcards
The Key Qualities of Useful Information
- Materiality
- Comparability
- Accounting Conventions
- Business Entity
- Historical Cost
- 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. If the information is not material, it should not be included in
the financial statements. It will merely clutter them up and perhaps
interfere with the users’ ability to interpret them.
It may be possible to disregard the proper accounting treatment of
items where they are deemed to be immaterial. For example, low-
cost non-current assets may be charged as expenses to the
statement of profit or loss rather than to the statement of financial
position and depreciated
Comparability
Users of accounting information often want to make comparisons.
They may want to compare the performance of business over time
(for example, they may want to compare profit this year with that of
last year). They may also want to compare certain aspects of
business performance (such as levels of sales) to those of similar
businesses. Better comparisons can be made where the
accounting system treats items that are basically the same in the
same way and where policies for measuring and presenting
accounting information are made clear.
A business should use the same accounting methods from one
year to the next, and changes to policies are only permitted where
valid reasons can be provided.
For example, you must use the same methods of depreciation (see
next lecture) from one year to the next. Consistency of treatment
will enable comparisons to be made between the financial
statements of different years.
Accounting Conventions
Accounting has a number of rules or conventions that have
evolved over time. They have evolved as attempts to deal with
practical problems experienced by preparers and users of financial
statements, rather than to reflect some theoretical ideal
Business Entity
An owner and the business are separate entities, the owner’s
personal affairs should not be included in the business accounts.
Historical Cost
Resources acquired by the business are recorded at their original
purchase price
Prudence
When assembling accounts, the preparer should always err
on the side of caution when making judgements in relation to
any estimates that are required when faced with uncertainty,
such that assets or income are not overstated, and liabilities
and expenses are not understated. Profits should not be
anticipated and should only be recognised when they can be
measured reliably
Going Concern
Financial statements are normally prepared on a going
concern basis.
The financial statements should be prepared on the assumption
that the business will continue operations for the foreseeable
future (at least a year from the accounting date), unless there is
evidence to the contrary. If the business is to be discontinued, non-
current assets and non-current liabilities would need to be
reclassified as current, and the values at which assets are shown
in the statement of financial position would also need to be
assessed.
Money Measurement
Financial statements only include assets which can be measured
reliably in monetary terms; items such as good customer
reputation and well-trained staff are excluded on the grounds that
they are difficult to value, and their inclusion would only serve to
reduce the reliability of the statements.
Accruals/Matching
Expenses should be included in the statement of profit or loss in
the period to which they relate and matched with the revenue they
help to generate.
Applying this convention means that an expense reported in the
statement of profit or loss for a period may not be the same as the
cash paid for that item during the period.
