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Published by kanz_h

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Categories:Topics, Art & Design
Published by: kanz_h on Mar 11, 2011
Copyright:Attribution Non-commercial

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03/11/2011

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Accounting for changing pricesHistorical cost accountingIt is a conventional valuation concept where resources are valued in accordancewith their cost of acquisition by the enterprise.Advantages (i) It is verifiable(ii) It is objectiveDisadvantages(i)Fixed assets will be undervalued at times of rising prices.(ii)Depreciation will be based on HC figures and therefore will not provide atrue figure for asset use(iii)Stocks will not reflect current costs(iv)profit will consequently be understated(v)The objectivity of HCA is limited to cash.In fact all other items even if they are valued at historical cost , they are subjective for example stock valuation method etc.Current Purchasing PowerUnder this method the HC figures are adjusted to reflect changes in the price levels using the Retail Price Index for the purpose.Current Cost accountingUnder this method adjustments are made to fixed assets, depreciation, stocks, Cost of sales, monetary working capital, Gearing.No adjustments are made to Monetary assets(Debtors,bank,cash) and Moneatry liabilities(Creditors) in the Balance sheets.Indices are used separately for stocks, Fixed assets , debtors and creditors.Adjustments are made as follows:Item Dr CrFixed assets restated Fixed assets Current cost reserveAdditional depreciation on restated figures P&L CCRStocks restated Stock CCRCost of sales adjustment P&L CCRMonetary Working capital adjustment P&L CCRGearing CCR P&LConcepts and conventionsThese are a set of priciples which are assumed to have been applied when preparing accounts unless otherwise statedConcepts Definition Examples of applicationGoing concern According to this concept it is assumed that the business will continue to run in the foreseeable future A company wishes to discontinueits operation next year therefore its assets will be valued as realizable in aforced sale.Matching/Accruals concept A company is required to compare in its Profit and loss account its income with those expenses which have been incurred in earning that income Acounting for accruals and prepayments in the Profit and loss account.An expense for a particular year is treated as an expense for that year even if it has been paid in another year.Consistency concept Whatever principles have been applied in a business haveto applied continuously e.g Depreciation method,stock valuation method If a business has chosen to apply the Diminishing balance method for depreciating a fixed asset the same method has to be applied consistenly.If the company decides tochange this has to be disclosed in the accountsMateriality concept Items are treated in the accounts according to their impact on the financial statement in terms of their value. One small business may treat a calculator costing $200 as a fixed asset while another big business might treat a calculator costing $2000 as repairs and maintenance in the P&LaccountPrudence A company will rather understate profits rather than overstate them. Costs are assumed to have been incurred as soon as recognized while income

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