Information should be relevant to users, helping to confirm or correct prior expectations and assist in forming, revising, or confirming expectations about the future.

Reliability

Information is reliable if it is:

Dependable
Independently verifiable
Free from bias
Free from significant errors
Prepared with suitable caution regarding judgements and estimates.

Understandability

Understandability depends on the clarity of information and the abilities of users. Information should not be excluded simply because it may be difficult for some users to understand.

Capital and Revenue Expenditure/Receipts

Capital expenditure: Money spent on purchasing, improving, or extending non-current assets.
Revenue expenditure: Money spent on running a business day-to-day.
Capital receipt: Money received from sources other than normal trading activities.
Revenue receipt: Money received from normal trading activities.

Inventory Valuation

Inventory must always be valued at the lower of cost and net realisable value.

Cost: Actual purchase price plus additional costs (e.g., carriage inwards) to bring inventory to its present condition.
Net realisable value: Estimated receipts from sale less any costs of completing or selling the goods.

Year-End Adjustments

Adjustments to accounting records are often necessary to present a more accurate view of profit/loss and financial position.

Accrued Expenses

An expense relating to a period but unpaid at the end of that period.

Income Statement: Added to the total expense.
Matching Principle: The amount transferred to the income statement should represent the expense for the accounting period.
Double Entry: The unpaid amount is brought down on the credit side and included as a current liability in the statement of financial position.
Entries During the Year: Debit the expense account and credit the cash book with the amount paid.
Entries at Year-End: Debit the expense account with the unpaid amount, carry it down as a credit balance, transfer the expense for the year to the income statement, and include the balance as a current liability.

Prepaid Expenses

An expense paid during the year that relates to a future period.

Income Statement: Deducted from the total paid.
Matching Principle: If part of the payment is for the next year, it should be deducted, so the income statement only shows the expense for the current year.
Double Entry: The amount paid in advance is brought down on the debit side and included as a current asset in the statement of financial position.
Entries During the Year: Debit the expense account and credit the cash book with the amount paid.
Entries at Year-End: Credit the expense account with the amount paid in advance, carry it down as a debit balance, debit the income statement with the expense for the year, and include the balance as a current asset.
Inventory as Prepaid Expense: Stationery, postage stamps, etc., at year-end can be considered a prepaid expense.
Closing and Opening Balances: Closing balance of previous year will become opening balance of current year.
Using one ledger for two expenses: Apply the same principles as for a single expense account, but there may be two opening and closing balances.

Accrued Income

Income relating to a period that has not been received at the end of that period.

Income Statement: Added to the total received.
Matching Principle: Income earned but not yet received must be added to the total received.
Double Entry: The amount not yet received is brought down on the debit side and included as a current asset in the statement of financial position.
Entries During the Year: Credit the income account and debit the cash book with the amount received.
Entries at Year-End: Credit the income account with any amount due but not received, carry it down as a debit balance, credit the income statement with the income for the year, and include the balance as a current asset.

Prepaid Income

Income received during the year that relates to a future period.

Income Statement: Deducted from the total received.
Matching Principle: Any amount received relating to a future period must be deducted.
Double Entry: The amount received in advance is brought down on the credit side and included as a current liability in the statement of financial position (as the business has a liability to provide a service or benefit).
Entries During the Year: Credit the income account and debit the cash book with the amount received.
Entries at Year-End: Debit the income account with the amount received in advance, carry it down as a credit balance, credit the income statement with the income for the year, and include the balance as a current liability.
Opening Balances: In the second and subsequent years, opening balances on income accounts (as well as expense accounts) must be considered.