Accruals: Arise when services have been supplied to a business but have not yet been paid for at the time the accounts are drawn up.
- Without Adjustments:
- Profits in current accounting period will be overstated as the unpaid costs have not been implemented into the accounts.
- Profits in the next accounting period will be understated as it will included the costs for the current year and unpaid costs of previous year.
- Making Adjustments:
- Adds all unpaid costs to the current accounting periods total costs, it must be charged to the profit and loss acccount for the appropriate time when the service was actually used.
- They are added to Current Liabilities in Balance sheet.
Money Measurement: Only items and transactions that can be measured in monetary terms are recorded in a business's account books. This make the making of accounts as objective as possible and allows for easier comparisions of accounts over time and between different businesses.
Conservatism (Prudence): States that accountants should provide for and record losses as soon as they are anticipated. Profits, on the other hand, should not be recorded until they are realised.
- Arises when accountants are required to make any estimates when drawing up accounts.
Realisation: States that all revenues and profits should be recorded in the accounts 'when the legal title to the goods is transferred. This means that customers are legally bound to pay for goods they have bought.
Double Entry Principle: States that all business transaction have a dual aspect and both sides should be recorded if the accounts are to be balanced. They should be recorded in a debit and credit entry.