Accounting Concepts

All of the concepts you will need to know for unit 2 AS accounting.

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  • Created by: Holly
  • Created on: 06-06-10 11:33

Going concern

Going Concern assumes that the business will continue to trade after the final accounts have been produced.

It assumes there will be no major sell offs.

Assets are worth much less when a business fails (gone concern).

All assets are normally valued at cost.

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Accruals / matching

Expenses and revenue need to be matched to the financial period in which the goods or serviced were used.

Trading profit and loss should be adjusted for accruals and prepayments

For example, rent paid in advance should not be included and wages for hours staff have already worked but not yet been paid for should be included

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Consistency

Keep accounting methods constand e.g straight line depreciation. Changes can be made provided A NOTE IS PUT IN THE ACCOUNTS.

Consistency allows year on year comparison to be made

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Prudence

Where doubt exists be conservative.

Anticipate all losses but profits should only be counted once earned.

Value stock at net realisable value.

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Materiality

Where things are of very low value they are not material to the business, e.g a wastepaper bin.

These items are counted as expenses in the profit and loss account rather than assets in the balance sheet.

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Realisation

Profits can only be taken once and only when a sale occurs.

A sale happens when goods are supplied and accepted (even if you have not yet been paid)

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Business Entity

Business is separate to non business activities of the owner.

The only time they mix is with drawings, capital, of stock taken for own use.

This means no holidays or personal cars included in expenses.

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Objectivity

Objectivity is being unemotional in your judgement.

The accounts must be seen to be fair.

For example, not valuing your van above cost because it has sentimental value

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Cost

Assets included in the balance sheet are usually valued at cost

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