Accounting Concepts Test Revision

Accounting Entity Assumptions

A business is separate from the owner of the business.The accounting records of a business are separate from the personal financial records of the owner.Every business is an accounting entity. However, not every business is a legal entity.A sole trader and a partnership are only accounting entities.A company is both an accounting entity and a legal entity.

Monetary Assumption

Accounting records are maintained in the Australian Monetary unit ($AUD)

Accounting Period Assumption

The life of a business is divided into intervals of time known as accounting periods. The length of an accounting period will vary from business to business. A business will usually have a 12 month accounting period in order to calculate the annual profit/loss and the income tax payable on any profit. In addition, a business may also have shorter accounting periods of in between 1 and 6 months. An income statement is prepared for each period and a balance sheet is prepared at the end of each period.

Going Concern Assumption

It is assumed that a business, once it has commenced, will continue to operate for the foreseeable future. The going concern assumption allows assets to be valued at historical cost in the balance sheet. However, certain assets such as land and investments, are often re-valued at regular intervals of time and closing inventory is valued at the lower of cost or net realisable value. The going concern assumption is not followed if there is evidence that a business will close down in
the near future. In this type of situation, the assets should be shown in a balance sheet at their liquidation values.

Historical Cost Principle

An asset is recorded in an accounting system at its acquisition value and this value is not changed as time passes.

Double Entry Principle

When a transaction takes place, there are usually two accounts involved. One is debited and one is credited. However, where transactions attract GST, the general rule is that three accounts are always affected, but the debits must still equal the credit.

Materiality Principle

Information is material if the omission of this information from an accounting report could influence the investment decisions of the users of this report. An accounting report should contain all the material information.

Cash Accounting

Is the method of profit calculation in which income is included in an income statement in the accounting period in which money is received from a service provided or from a sale. An expense is included in an income statement in the accounting period in which the expense is paid for.

Accrual Accounting

Is the method of profit calculation in which income is included in an income statement in the accounting period in which a service is provided or a sale is made. An expense is included in an income statement in the accounting period in which the expense is generated or consumed (used)

Conceptual Framework

A document that sets out the qualities of a good accounting report. Defines terms like assets, liabilities, equity, income and expenses.

Assets

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.

Liabilities

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.

Equity

Equity is the residual interest in the assets of the entity after deducting all its liabilities

Income

Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims

Expenses

Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

Trial Balance

A list of the names and balances of each ledger account on a particular day.

Inventory

AASB 102 Inventories defines inventory as

i) assets held for resale,
ii) partly finished goods and
iii) supplies that will be consumed in the manufacture of a product or in providing a service.