Accounting concepts, conventions, and definitions

Accruals (Matching) Concept

Revenues and expenses are recognised in the period they are EARNED or INCURRED — not when cash is received/paid.

Cash Basis

Recording transactions only when cash actually changes hands. Not used in proper accounting — leads to misleading figures.

Consistency Concept

Use the same accounting methods (policies) year after year. Don't change without good reason. Changes must be disclosed.

Going Concern Concept

Assume the business will continue to operate for the foreseeable future. If NOT a going concern, assets must be valued at current market value (likely lower).

Prudence Convention

When uncertain, be cautious. Don't overstate assets or income. Don't understate liabilities or expenses.

Asset (Framework Definition)

"A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to arise."

Intangible Asset

An asset with no physical form (e.g. goodwill, brand names, patents). Must be identifiable, controlled, and measurable.

Tangible Asset

An asset with physical form (e.g. machinery, buildings, vehicles).

Liability

"A present obligation arising from past events, the settlement of which is expected to result in an outflow of resources."

Provision

"A liability uncertain of timing or amount" (IAS37). E.g. a likely legal claim where the exact cost is unknown.

Goodwill

The premium paid when buying a company above the value of its assets. Only appears on the balance sheet if PURCHASED (not internally generated).

Amortisation

Depreciation for intangible assets. E.g. spreading the cost of a patent over its useful life.

Capitalise

To treat an expense as a capital (asset) purchase rather than charging it straight to profit.

Write Off / Expense

To charge a cost immediately against profit in the current year.

Materiality

Information is material if leaving it out would change the decisions of users. A sub-concept of relevance.

Substance over Form

Record transactions based on their economic reality, not just their legal form.