Accounting Unit 2

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What is the concepts of accounting?
The concepts of acounting are rules that all accountants must follow when preparing a set of final accounts.
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What are accounting concepts sometimes referrred to?
They are sometimes referred to as "ACCOUNTING PRINCIPLES"
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Why is it useful that accountants follow these concepts?
It's useful because it ensure the users of accounts (stakeholders) that they can rely on the information as they are accurate and precise.
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List the 9 accounting concepts.
1/ Going Concern 2/Cost 3/Prudence 4/Business entity 5/Materiality 6/Realisation 7/Objectivity 8/Consistency 9/Accrual
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What is going concern?
Accounts must only be prepared under the assumption that the business will continue to trade in its present form.
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What must assests be valued at in the GOING CONCERN concept?
All assest are valued at COST... not what they could be sold for.
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What is the accruals concept?
Relates to the VALUE of resourcs used up by a business and the benefits recieved from the use of the resources. The VALUE of the resource may be different from the AMOUNT PAID to acquire the resource.
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ACCRUAL EXAMPLE/ Rent paid during financial year ended 31st March 2009 was £7200. Rent of £500 for March 2009 was paid in April 2009. How should the accountant record this?
As a result of accrual concept, the total rent recorded will be as follows: £7200 This is because the business has had the benefit of using the premises worth £7700 even though it has only paid rent worth £7200.
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What is the Prudence concept?
It ensures REVENUE and PROFIT are only included in the final accounts when they have been REALISED.
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What is the Realisation concept?
It ensures that all PROFITS are RECOGNISED when the ownership of the assets is passed to a customer.
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An example of the Realisation concept..
Will is an engineer and he is certain that in July Jack will sign a contract to purchase goods worth £2000. Although Will is certain and Jack could've given Will some £ he cannot record this in his accounts until the ownership has been registered.
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What is the consistency concept?
Ensures that once a method of treating information has been established. the same method should be continued.
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What happens in the consistency concept is not applied and different methods are used?
If a different method is used, inter year comparisons can not be made, therefore trends cannot be identified.
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What are the two accounting methods used?
Straight line methods and Reducing balance method.
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What is Business Entity?
Ensures that only the revenue and expenses related to the business is recorded. Private affairs of owners must not be included in the book of accounts. For example, shopping bills.
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What is the Materiality concept?
Information will be material if the INCLUSION or EXCLUSION of info in the financial statement would mislead the users of that statement. For example, the exclusion of a £1.00 purchase will not be material.
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What is the Cost concept?
ASSETS and EXPENSES must be entered at their cost, it must not be entered at the assumption of a higher or lower price.
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What is the Objectivity concept?
Records should not be subject to PERSONNEL BIAS and they must be verified by SOURCE DOCUMENTS
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Card 2

Front

They are sometimes referred to as "ACCOUNTING PRINCIPLES"

Back

What are accounting concepts sometimes referrred to?

Card 3

Front

It's useful because it ensure the users of accounts (stakeholders) that they can rely on the information as they are accurate and precise.

Back

Preview of the back of card 3

Card 4

Front

1/ Going Concern 2/Cost 3/Prudence 4/Business entity 5/Materiality 6/Realisation 7/Objectivity 8/Consistency 9/Accrual

Back

Preview of the back of card 4

Card 5

Front

Accounts must only be prepared under the assumption that the business will continue to trade in its present form.

Back

Preview of the back of card 5
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