Notesale: Turn your study into money

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UNIVERSITY OF THE WEST
MONA CAMPUS
Financial Accounting – ACCT 1005(MS15D)
Accounting Concepts & Conventions
Accountants, who represent various accounting bodies, have over the years developed a number
of rules and practices governing the preparation of financial statements
...
These
GAAP provide the basis for the preparation of the financial statements, hence an understanding
and appreciation of them is critical for students of accounting
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Accounting principles and concepts seek to ensure that accounting information is relevant,
reliable and comparable
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The main significance of the going concern concept is that the assets of the
business should not be valued at their “break-up” value or realizable value, which is the amount
that they would sell for on the open market in the event of a business closure
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Under the accruals basis, revenues are recognized when goods are
sold or when services are rendered and expenses are recognized when incurred
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E
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On December 1, 2003, a used car dealer buys 20 cars at a cost of $250,000 each
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Uncollected cash at December
31, 2003 was $1,100,000
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It is worthwhile to make mention of the cash-basis of accounting, which unlike the accruals
basis, recognizes revenues in the period of receipt and expenses in the period of payment
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IAS 1 requires that an entity prepare its financial statements, except for cash flow information,
using the accrual basis of accounting
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Consistency Concept
This concept states that the accounting treatment of like items should be consistently applied
from one accounting period to the next
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It is important to note
here that consistency does not mean that the method cannot be changed, but where this is done,
this should be stated explicitly in the notes to the accounts
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 If it can be seen that some loss will be incurred at a future date, then the anticipated loss
should be provided for in full in the income statement
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e
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Historical Cost Concept/Cost Principle
Under this concept it is assumed that transactions are entered into the accounting records at their
original or actual cost
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This method is criticized by many as not being in accord with economic reality and
accountants have taken various steps in recent years to overcome the deficiency, by preparing
supplemental publication of selected inflation adjusted data
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Materiality is looked
at in line with cost-benefit
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All material items must be reported in the financial statements
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In such case theory is said to take a back seat to practice, and the accountant would handle the
matter in the most expedient manner possible, e
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writing off the expense relating to the
purchase of a garbage bin as a one-time expense
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Entity Concept
The owner of the business and the business are separate economic entities
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If this assumption
were not made then the personal economic activities of the owners e
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the purchase of a home,
payment of bills relating to home etc
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If
this were done, the resulting financials would not be meaningful
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Reliability/Objectivity Concept
Accountants strive to produce financial reports that are unbiased, thereby reducing or eliminating
the various user interpretations that may arise
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Reliable data are verifiable
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Although subject to criticism, historical cost
accounting is said to be both definite and verifiable
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It is therefore assumed that all assets, liabilities, income and expenses can be
quantified in monetary terms
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e
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Stable Monetary Unit Concept
Duality or Double Entry Concept
This concept states that every transaction is twofold i
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every transaction affects at least two
accounts
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