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Flashcards in Accounting Concepts and Conventions Deck (9)
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1

List the eight concepts/conventions

  1. Business entity convention
  2. Prudence convention
  3. Duality concept
  4. Objectivity/Fairness convention
  5. Stable monetary section convention
  6. Going concern convention
  7. Historic cost convention
  8. Money measurement convention

2

Money measurement convention

Only items which can be expressed in monetary terms are included in the financial statements. This eliminates brand reputation, customer loyalty, employee talent, the quality of the company's processes, etc.

3

Historic cost convention

All assets are stated on the balance sheet of the company at their historic cost i.e. their acquisition cost.

4

Business entity convention

Accounting treats the owner as separate from the business and the owners are dealt with as having a claim on their own business. There are legal liability differences.

5

Stable monetary section convention

This convention assumes that money will not change in value over time. Inflation is not accounted for. lt is necessary to be cognisant of this when reading a balance sheet.

6

Going concern convention

Financial statements will be prepared on the assumption that the company will continue to exist in the foreseeable future. This is important because the value of assets in a company which is about to be sold (e.g., due to bankruptcy) may be lower and provision for the losses would need to be taken into account in the statements.

7

Objectivity/Fairness convention

Financial statements should be based on objective verifiable, reliable, evidence.

8

Duality concept

This refers to the fact that each recorded economic transaction has two aspects, both of which will affect the balance sheet in an equal and opposite way, so that the balance sheet continues to balance. This is the result of the double-entry bookkeeping system which is used in accounting.

9

Prudence convention

Understate rather than overstate profits, assets, and alike. Provide for any known contingencies. Anticipated losses should be recorded but profits recognised only when they are realised. The question of when profits are realised is one related to a concept known as the realisation concept.