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Module 1: Accounting concepts

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Principi di account

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XSIQ
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Accounting - Accounting principles

Accounting principles

The impact of accounting principles (otherwise known as conventions,
doctrines or assumptions) on the preparation and presentation of financial
information is an important aspect of all Accounting units. These
principles support the general accounting concepts.

These principles are described in the following pages. It is also
important to recognise how they may be breached.

ACCOUNTING PERIOD
The life of the business is broken up into arbitrary periods for the
purpose of measuring profit.BREACH
The owner decides to wait until the project is completed before preparing
the financial reports.

CONSERVATISM
May also be known as prudence. Losses should be recognised as soon as the
business is aware of their likely event whilst profits should not be
recognised until they actually occur.BREACH
The net realisable value of stock has fallen below cost yet the owner
refuses to adjust cost of goods sold calculations.

CONSISTENCY
Accounting reports from one period to the next should be prepared on the
same basis.BREACH
The owner uses one method of depreciation for a particular asset in one
period and an alternative method in the second period.

DEPENDABILITY
Data used in accounting should be subject to stringent internal
controlBREACH
Price calculations are based on outdated information.

DISCLOSURE
The owner is obligated to disclose any transactions of a significant
financial nature in their reports.BREACH
The owner determines not to include the recent sale of property in the
financial reports as this may deter potential buyers of the business.

DIVERSITY
Allows for the fact that no two firms are the same and therefore may use
different accounting methods.BREACH
The owner decides that because the business down the road uses the
straight line method of depreciation his business should do the same.

ENTITY
Recognises that the business, from an accounting viewpoint, is separate
from the owner.BREACH
The owner includes in the business balance sheet personal assets such as
his golf clubs.

GOING CONCERN
Assumes that the life of the business is ongoing, indefinite and
continuous. Also known as the continuity principle.BREACH
The owner does not wish to prepare a balance sheet but rather reports
non-current assets as costs in the period they were acquired.

HISTORICAL COST
All items are recorded at the original cost, that is, the cost at which
they were acquired. BREACH
Property owned by the business is shown at the higher market value rather
than for the amount at which it was originally acquired.

MATCHING
Sets out the point of time at which revenue may be recognisedBREACH
A contract is signed for advertising in your magazine. Although you will
not include any advertising in this period's work you still include the
revenue paid in advance.

MATERIALITY
Is concerned with which data should be disclosed in financial reports. All
transactions regardless of size should be recorded.BREACH
The owner does not bother to record minor withdrawals of stock from the
business.

MONETARY
Only events whose impact can be measured in money terms can be treated as
a financial transaction and thus entered in the books of the business.All
transactions should be recorded in money terms.BREACH
Stock is shown in financial reports in quantity amounts.

VERIFIABILITY
All transactions recorded in the books of the business are supported by
documentary evidenceBREACH
Payments are made and recorded without supporting evidence such as
invoices or cheque butts.

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