Accounting Concepts- Unit 2

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  • Created by: KatyX97
  • Created on: 04-04-15 16:05

Business Entity

  • Transactions recorded in organisation's accounts must relate to that organisation
  • Personal assets of a sole trader and partners of a partnership must be kept separate from the business
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Materiality

  • All information provided is significant to the users of the statements- i.e. it should matter
  • Trivial information should not be included- i.e. small expense items, donations to charities, plants for office, window cleaning etc.
  • Can all be put together under 'sundry expenses'
  • Low cost non-current assets are often charged as an expense in the income statement- e.g. staplers, waste paper bins etc.
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Cost

  • Assets and liabilities are valued at cost.  
  • The actual amount of the original transaction is used (objective rather than person's opinion)
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Going Concern

  • Assumes that the business will continue trading for the next 12 months (at least)
  • As a result of this concept it means that the resale value of assets can be ignored
  • This concept supports the cost concept
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Accruals/Matching

  • Profits should be calculated over a period of time, ensuring that revenue for that period is matched with the expenses incurred in earning that revenue.
  • It means that profits are calculated whether money has been received or not.
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Consistency

  • Requires preparer of accounts to use the same procedures and policies year on year. For example:

            Inventory valuation

            Depreciation

            Materiality Concept

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Consistency

  • Requires preparer of accounts to use the same procedures and policies year on year. For example:

            Inventory valuation

            Depreciation

            Materiality Concept

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Prudence

  • Where there is doubt asset values and profits should be understated rather than overstated
  • This is because those using the accounts should not be misled into believing that the business is doing better than it is
  • Examples: inventory valuation, depreciation, accruals and prepayments, provision for doubtful debts
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Realisation

  • Revenue should be recognised when it is certain.  i.e. cash is received or there is a promise to pay (receivables created)
  • A sale is regarded as certain when cash is paid or invoice has been issued
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Objectivity

  • Wherever possible, accounting information should be factual (objective) rather than somebody's opinion (subjective)
  • Very closely linked to cost concept. This concept is at the heart of asset valuation
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