Accounting Concepts- Unit 2

• 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

• 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.

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

• 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

• 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.

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

            Inventory valuation

            Depreciation

            Materiality Concept

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

            Inventory valuation

            Depreciation

            Materiality Concept

• 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

• 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

• 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