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ACCOUNTING CONCEPTS

• Any changes should be highlighted and their impact


explained
Business Entity
• The affairs of the business are kept separate from
those of the owners.

Prudence
Historical Cost • Revenue and profits are not anticipated but are
• Transactions are recorded at their cost to the
recognised by inclusion in the profit and loss account only
when realised in the form of cash or other assets; the ultimate
business. cash realisation of which can be assessed with reasonable
• Requires that assets appear in the balance sheet at certainty. Profit or any asset should be stated at the lowest
reasonable figure.
their original cost, less any depreciation to date.
• Provision is made for all known liabilities (expenses
• It is assumed that the purchasing power of money will and losses) whether the amount is known with certainty or is a
remain unchanged. best estimate in the light of information available. Any liability
should be stated at the highest reasonable figure.

Money Measurement
• Accounting statements restrict themselves to matters
Realisation
which can be measured objectively in money terms. • States that income is recognised as and when it is
• Items such as the values of the company's customer
“earned”.
base and its work force are excluded. • Transactions are realised when cash or a debtor
replace goods or services.

Dual Aspect (Duality) • Goods sent on a sale or return basis is treated as


forming part of stock until the customer accepts the goods.
• The double entry system requires all transactions to
have two entries, one on the debit of an account and one on
the credit of the same or a different account. Accruals (Matching)
• It enables balance to be maintained in the accounting • Expenses are recognised as and when they are
equation. incurred, regardless of whether or not the amount has been
paid.

Periodicity (Time Interval) • Costs are matched with related income.


• It requires that a balance sheet and profit and loss • Where costs have been incurred and there is no
account should be produced at regular intervals. related income in the period or in future periods, with which the
• Most businesses produce annual accounts and the costs can be matched, they are treated as an expense of the
accounting period.
Companies Acts require annual accounts for companies.
• Public companies produce half yearly interim
accounts and many businesses produce monthly or quarterly Materiality
accounts for internal purposes.
• There is little point in providing information which is so
detailed as to be unintelligible.
Going Concern • The statements can be made clearer by showing
• It is assumed that a business will continue indefinitely
totals such as “administrative expenses” instead of listing every
item which makes up this heading.
in its present form.
• An amount may be considered material in the
• If a business is not a going concern, its assets should accounts if its inclusion in, or omission from, the accounts
be valued in the balance sheet at the amounts they could be would affect the way people read and interpret those financial
expected to fetch in an enforced sale. statements.

Consistency Substance Over Form


• Transactions of a similar nature should be recorded in • Some transactions have a legal form which is different
the same way in the same accounting period and in all future from the underlying commercial reality or substance. In such
accounting periods. cases, for accounting purposes, the substance is preferred to
the form.
• The figures published by the company should be • Hire purchase transactions. The legal form that the
comparable from one year to the next. 'buyer' of an asset under a hire purchase transaction, hires the
• Accounting policies should not be changed from one asset until the final payment when the ownership is transferred
year to the next unless there is a very good reason for doing to him. The substance of the transaction is that the asset is
so. acquired by the 'buyer' and that he has a loan to assist him in
the purchase which he repays over a period of time together
with interest.
• Goods sold subject to reservation of title. The
legal form of these transactions is that goods are sold with the
agreement that ownership of the goods does not pass from the
vendor to the buyer until payment is made. The substance of
the transactions is that they are normal credit sales with the
reservation of title clause in the contract for sale being of
importance only if the buyer becomes insolvent.