Accounting Concepts

Accounting Concepts

Remember the catchphrase “Go Compare”

Going Concern

•          Accountants (you!) assume that the business will continue trading as normal unless it has reason to think otherwise.

Consistency

‘Once an accounting method of treating something has been decided – stick with it ‘

Clear links to Depreciation

Allows a firm to make inter year comparisons to see if performance is improving (Ratio Analysis)

Cost

‘Assets should be valued at cost price’

•          Based on factual information – invoices to prove it!

•          Clear links to Stock and Non-Current Assets Valuation

Objectivity

‘Opinions should not go in the accounts so be objective not subjective’

•          Accounts are based on facts.

•          E.g. Management ‘skills’ do not go in the books as people opinions on them will vary.  If they are good at their job then profits will rise and the value of the business will then rise

Materiality

‘If something that will not materially affect the books it need not go in’

•          Stock of stationery in a head office need not be counted since it is likely they will have stock of this next year

•          Note: - what is immaterial to one firm may be substantial to a much smaller one!

Prudence

‘Anticipate all losses, 

Never anticipate profit until realised’

Overstate rather than understate liabilities

Understate rather than overstate assets

•          This is an underlying concept and suggests you should be cautious in your figures

•          Clear links to Provision for Doubtful Debts and Stock Valuation

Accruals

Income and Expenditure should be matched to the period it belongs to’

•          Accruals should be added to the income (or expense) and put on the balance sheet as a Current Asset (or Current Liability) – remember ADDCRUALS!!!

•          Prepayments should be deducted from the income (or expense) and put on the balance sheet as a Current Liability (or Current Asset)

•          Clear links to Depreciation of Non Current Assets  (known as Capital Expenditure)

Realisation

‘A sale is realised when legal ownership of an item has been transferred’

•          This does not mean when cash is paid - we would never have trade receivables otherwise!  It could be that its signed for now (legally changes hand then they will pay for the item later)

Entity