"Going concern" concept
The assumption is made that the business entity will continue in existence for the foreseeable future. This is an important concept, as the value placed on the assets of a continuing business is different from the value placed on the assets of a closing business. Stock is normally valued at cost price but if the business were about to cease trading, then the resale value of the stock would be more relevant, as the owner will try to sell off the remaining stock. One obvious problem with this concept is that we can never be entirely sure that the business will continue. The concept also applies to the significant curtailment of any part of the business operation.
Consistency concept
Once a business has decided which accounting methods it is going to apply and how it is going to interpret the various rules of accounting, it should be consistent in these matters from year to year. Consistency is necessary so that the results of the business, as shown by the accounts, may be compared from year to year. Changes should be adopted only if the old methods, for a good reason, can no longer apply.
Concept of prudence
The accountant should adopt procedures which do not overstate or anticipate profits and do not understate losses but which do provide for all potential losses. Profit should be included only when it is reasonably certain that cash will be received. Adopting the concept of prudence is a measure against drawing money from the business out of profits which may not materialise, or when a loss arises which had not been anticipated.
Accruals concept
Revenues and costs are recognised as they are earned or incurred, and not when the money is received or paid.
Other Concepts of Accountancy
In addition to the four basic concepts of accounting, there exist various other conventions, which may be encountered in examinations. (You should note here that, sometimes, the terms accounting "rules", "concepts" and "conventions" are used interchangeably, so do be prepared for this.)
Historical cost
Accounting information is quantitative information, recorded in monetary value at "historical cost". This means that transitions are recorded at their original price, e.g. purchases of stock are recorded at cost price.
Materiality
If it would serve no useful purpose, i.e. it is not worthwhile to record an item in a particular way, or to show an item separately in the accounts, then it should not be done. If an item is "immaterial", it may be that the costs of recording it in a particular way outweigh any benefit of doing so. Each business must quantify "materiality"individually as.
Matching
Income should be included in the accounts in the same accounting period as the expenses relating to that income.
Realisation
Transactions are recorded when the customer incurs liability for the goods or services(normally, liability is incurred when the goods or services are actually received). Any profit on the transaction is not realised until that time. This convention is in conflict with the economist's view that, if an asset has increased in value, that increase should be recognised.
Dual aspect
Every transaction involves an act of giving and an act of receiving.
0 Comments