Topic 9 - Accounting concepts Flashcards
What are accounting concepts?
Guidelines to be followed by accountants in the preparation of financial statements. They ensure that the financial statements show a true & fair view of the business.
What are the advantages and disadvantages of accounting concepts?
Advantages:
- Provide framework for preparing financial statements
- Provide systematic way of preparing financial statements which makes them bias-free and thus show true and fair view of the business
- Accounting processes are standardised as all businesses follow same rules which allows for accurate comparisons and valid decisions made with confidence
Disadvantages:
- Accounting concepts are open to different interpretations which may make comparisons less reliable
What is the consistency concept?
Once a business has a fixed method for the accounting treatment of an item, it should enter all similar items that follow in exactly the same way. This helps compare year to year results and helps decision making. A method change can occur but must be made with lots of consideration and declared in notes to the accounts.
What is the prudence concept?
The accountant should always exercise caution when dealing with uncertainty and adopt a conservative approach to the valuation of profits and assets. As a result, the accountant will normally make sure that all known losses and liabilities are recorded in the books but that profits and gains will not be recorded if they are anticipated.
What is the accruals concept?
It is about matching the correct expenses and incomes to the correct time period end and thus calculating the correct profit for the year.
What is the business entity concept?
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 the personal resources of the proprietor(s) affect the accounting records of a business is when they introduce new capital or take drawings out.
What is the materiality concept?
Accounting does not server a useful purpose if the effort of recording a transaction in a certain way is not worthwhile. The size and type of business will affect the decisions as to which items are material.
What is the money measurement concept?
Accounting information is concerned only with those facts that can be objectively measured in monetary units. Financial records should be expressed in monetary terms.
What is the going concern concept?
The business draws its accounts assuming it will continue to operate for the foreseeable future and cary out its commitments and objectives. Therefore, it is considered sensible to use the historic cost when arriving at valuations of assets and a non-current asset that is expected to be used for several years is depreciated over this time.
