Accounting concepts

Capital expenditure

Expenditure that will benefit the business beyond the current accounting period as it will provide economic benefits beyond the current accounting period.
No effect on equity

Revenue expenditure

Expenditure that will benefit the business for the current period only, as it does not provide economic benefit beyond the current accounting period.

Decreases equity

Purposes of financial statements

Statement of accounting policies

Income statement

Statement of financial position

Statement of cash flow

Accounting policies

This informs users of the assumptions and concepts adopted in preparing the financial statements and how financial elements have been measured. It is an aid to understanding the statements.

P Income statements

To measure the profit/loss for the period and the components of the profit (income less expense)

P Financial position

To measure assets, liabilities and equity and the relationship between these elements at a point in time.

Cash flows

To show where cash has come from and how it has been spent over the period to be able to assess the entity’s ability to repay its debts and generate cash.

L Income statement

Does not include on-financial information e.g. quality f goods sold or services provided which may have an impact on the future of the business.

L Financial position

Assets are recorded at historical cost which may be out of date for lending purposes

Does not show non-financial information

Accumulated depreciation and allowance for doubtful debts are based on estimates so total net assets may be inaccurate.

Depreciation

It represents a decrease in economic benefits used up by the assets each accounting period.

Straight Line

Best reflects the decrease in economic benefits from using the asset. the decrease in economic benefit occurs evenly because the asset is used evenly throughout its lifetime.

Diminishing value

Best reflects the decrease in economic benefits from using the asset. The decrease in economic benefit occurs most at the start of the asset’s life, usually due to obsolescence.

Units of use

Best reflects the decrease in economic benefit from using the asset. The decrease in economic benefit occurs due to how much the asset is used rather than physical age.

Current assets

assets which are expected to be realised in the entity’s normal operating cycle.

Current liabilities

assets which are expected to be settled in the entity’s normal operating cycle.

Non-current asset

assets which are not expected to be realised in the entity’s normal operating cycle.

Non-current liabilities

assets which are not expected to be settled in the entity’s normal operating cycle.

Relevance

1. Definition

2. Predictive or Materiality

3. Use and decision

   1. Who

   2. What / How

Predictive

Information must be helpful in making prediction about the future.

Materiality

If it is of such nature or size that is likely to influence users of financial reports in making decision or influence decision making

Faithful representation

Information has faithful representation when it represents what it is supposed to represent and is complete and neutral.

Complete

All of the information that is supposed to be included has been included and is free from error. (accurate)

Neutral

The information is free from bias. (independent)

Verifiability

source documents provide proof or evidence that transaction has taken place and therefore the amount can be verified.

Timeliness

information has been received in time to be able capable of making a difference in decision making.

Understandability

The meaning of reports can be comprehended to help the users understand. (effort to understand or effort to help understand)

Comparability

Information in financial reports is comparable when users are able to identify trends or similarities and differences between that information and infomration in other reports, as they are prepared consistently. (same method and same time period).

Balance between qualitive characteristics

The accountant is to use their judgment and decide if a characteristic is more important than another characteristic, which cannot be identified and will be called a contingent liability shown as a note in the SoFP.

Accounting entity

The financial affairs of the business are kept separate and distinct from the financial affairs of the owner or other entities.

There are 2 applications

Monetary

All transactions must be recorded in NZ dollars.

There are 2 applications.

Going Concern

It is assumed that the business will continue its present operation into the foreseeable future.

One application.

Period reporting

The economic activity of the business can be divided into periods of equal length.

One application.

Historical Cost

All transactions are recorded at their original purchase price.

One application

Accrual Basis

The effects of transactions are recognized when they occur and reported in the financial reports of the periods to which they relate.

One application

Asset

Potential economic benefit

Control

Past Event

Relevant

Faihtful representation

Liabilities

Present obligation

Transfer of economic resources

Past event

Relevant

Faithful representation

Equity

Equity is the difference between the assets and the liabilities

Income

Increase in assets or decrease in liabilities which results in an increase in equity (more profit), other than those contributions relating by the owner.

The increase in assets is the money that has been received from

Or the increase in assets is the money that is owed and expected to be received from

Relevant

Faithful representation

Expense

A decrease in assets or an increase in liability which results in a decrease in equity (less profit), other than those contributions relating to the owner.

The decrease in assets is the money that has been paid to

Or the increase in liabilities is the money that is owed and expected to be paid to

Relevant

Faithful representation

Accounting entity

The financial statements only include the assets, liabilities, income and expenses of the business. Failure to do this means that the statements are not a true reflection of the financial performance and position of the business.

Paying personal costs/use is recorded as drawings or capital in the statement of financial position, not as an expense of the business.

Monetary

All transactions, assets, liabilities, expenses, income and equity are recorded in new Zealand dollar amounts, so that that they are in a common currency.

If a transaction cannot be given a New Zealand dollar amount or a value, it will not be recorded in the financial statements.

Going Concern

It can be seen that the business has no intention of liquidating or has identified any circumstances for them to stop trading. If such an intention does exist it needs to be disclosed in the financial statements. As a result of this the business will classify its assets and liabilities into both non-current and current.

Period Reporting

At the end of each period the business will prepare financial statements. So that the business is able to identify trends/similarities and differences/make comparisons in financial performance (profit, income, expenses)/financial position (assets, liabilities, equity).

Historical Cost

The property, plant and equipment are recorded at their original purchase price of $XXX and not heir current market value as this price can be verified through source documents. eg if credit invoices, if cash receipts.

Accrual Basis

The expense or income will be added/subtracted to the $XXX expense or income so that $XXX will be reported in the income statement for this period or next period as the $XXX relates to this period or next period.

The $XXX expense or income will be reported as accrued expense or prepayment or accrued income or income in advance, as current liability or current asset in the statement of financial position on balance day because this represents a potential economic benefit or a transfer of economic resources as the expense or income will have the cash/service to be received or provided this/next period.