6: Accounting Concepts

Business Entity

The business assets, liabilites etc are treated seperate from that of the owners personal assets. Only owners capital and drwains are recorded in the bussiness

Historical Cost

All assets and expenses are recorded at the price that was paid for them i.e actual cost

Going Concern

Accounting always assumes that the business will continue to operate for an indefinite period of time

Duality

The double entry system is used to record transactions (each is recorded twice)

Money Measurement

Bussiness accounts only record info that can be espressed in money terms and is objective. ie mangers skills is not expressed in money

Realisation

Profit is only recorves when it has acutally been earned. In accounting this when the legal titles of goodes passes on to the buyer, who has an obligation to pay for the goods or service

Consistency

When more than one method of calculation is available. the most realistic metohod should be applied ansd must be applies constisatenly year on year an dany chagne must be noted in final ccounts

Matching

Profit is calculatedby mathcing the revenue of the period against the costs of the same period irrespective of the amount haveing been paid of reviecen. the means that ists nesscade to adjust accounts for preapid or accured amount

Prudence

Never anticipate a profit, but always provide for all possible losses. accounts must always presen a realsitic picture of trh stat of the bussines and must not overstate proficts of assets no should it undstate loosses of liabilites

Materiality

Anything of interest which will influence a persones view of the bussines must b inclided.. DO not waste time in the elatborate records of minor items, bu include an y inofmation the may be of interese useres of accounting records

Internation Accounting Standards

• Reduce the varietyt of accounting practices worldiwide

• Make it easire to compare companies fincail statmens

• Ensture that the accountign pricnples a=in differnct countries are constant

• To protect theose who use accounting statements by improving the reliabily relvenacnce and transpearecny

Quality of accounting information

usefullness of fincail statmes is determined by th wualit of information in the finstal statment Measuer in the terms of 🇦

• Relevance

• Relaibilty

• Comprability

• Undesrtaniily

Relevance

Finiancial statements provide information to user reGARDIN THE PEROFMARNd and finaicl posttion of the bussiness and they may use the information to make decision. Any information that may influence their decision should therfore be shown by the statemnt. The informtion is relevnet to uses if it can be used to 🇦 confrimd or correc priot expectionation about past eevents

Assist in forming, revising or confiirmign exprectionabout the fture

Relibiltry

must be

dependable as being a true represtnation

Capable of being idepoendylt verifed

free from bias and sginit errors

preperared with cause e.g. when estiamting

Comprability

Info in the finaticl statem can de more usful if it can compared with simil information in another priod of time owith iother bussiness. to make compares the sure of finfafin statemsn need to be with other bussiness. To make comparasions, The users of financila statem need to be ware of the policies used to prepare the statemtn , and any change in the policies

Understatndibilty

Fincaincil statemes mustbe capacbles of being undersood by the users of those stateemnts. Information should not be omitted because it is belived that is too complex for uses to undersnat. User of infacil stastmens are normally asuumes to ahve a reaonsable knowldesg of bussiness and accounting