Accounting concept

The historical cost concept – asset shown at cost price

The money measurement concept

~ can be measured in monetary units ~ people agree to its monetary value

* does not show if ~ business has good\bad managers Unworkable monetary value to
which people agree on
~ serious problems with workforce

The business entity concept – business affairs treated separately from owner’s affairs

* owner affects business when he brings in money (introduce capital),or takes out money (drawings).

The dual aspect concept – assets of business & claims against them ARE EQUAL.

ASSETS = CAPITAL + LIABILITIES

The time interval concept – financial statements prepared at REGULAR intervals of the year.

The Accruals concept - Money received + Money paid +

money yet to receive money yet to be
but already earned paid but already
incurred.

REVENUE – EXPENSES = NET

PROFIT
* All income & charges relating to the financial period should be taken into account without regard to the date

of receipt or payment.

The going concern – business assumed to operate for at least a year after the reporting period.

* assumption should be rejected when: ~ business is going to close down soon ~ business bankrupt

Understandability – information readily understandable

Relevance – information must influence economic decisions of users by helping them to evaluate past,
present,
Ex: paperclip not material value too
small
future events.

Material – information of interest to stakeholders – changes in information could influence economic decision.

Reliability – free from error & bias – able to be depended upon by users

Substance over form – transactions & events accounted for and presented

- according to their substance & economic reality and not merely their legal form.

Prudence – gains and losses are neither overstated nor understated

~ losses are recorded, profits & gains are not anticipated.

Realization concept – profit & gain can only be taken into account when realization has occurred

~ ultimate cash realized when capable of being assessed.

* goods/services provided for buyer
Not realize :
* buyer accepts liability to pay for goods/services
Realize when - when order is received
* monetary value of goods/services been established
- when customer pays for the goods
* buyer able to pay for goods/services.
Completeness

Comparability – requires consistency *users informed of: accounting policies used, changes, effects of change.

Timeliness – information reported in a timely manner

Balance between benefit and cost – benefits of information exceed cost of obtaining it

Balance between qualitative characteristics – balance achieve that meets objective of financial statements.

Separate determination – amount of individual asset/liability determine separately from other asset/liability

Stability of currency – asset shown at original cost not at current market value. *users informed of this.

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Depreciation

~ non-current (fixed)asset: building, machinery, vehicles, motor fixtures

Definition – part of the original cost of a non-current asset that is consumed during its period of use by the

business. Depreciation is an expense. ~ Expense incurred for services consumed.

~ charged to profit & loss account ~ reduces net profit

– amount charge based on estimate of how much overall economic usefulness of fixed asset that has been

used up.

Causes – wear & tear

~ Physical deterioration – erosion, rust & decay

~ Obsolescence – process of becoming out-of-date.

~ Economic factors ~ Inadequacy – asset no longer used because of growth and changes in the size of the

business.

~ Time – assets that have a legal life fixed – after lease is over worth nothing

* term amortization is used instead of depreciation

~ Depletion – assets of wasting character – due to extraction of raw materials

- a provision of depletion account used.

~ Calculation: COST – AMOUNT RECEIVABLE (when fixed asset is put out of use)

Referred to as residual; salvage; junk; scrap value.

~ Residual value based on current price at balance sheet date NOT original purchase.

Provision for depreciation as an allocation of cost

~ if item bought & sold for lower amount in same accounting period

- difference in value charged as depreciation arriving at that period’s net profit.

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Calculating depreciation charges - straight line method & reducing balance method

Straight line method – number of years estimated *cost divided by number of years
COST – ESTIMATED DISPOSAL VALUE

NUMBER (p) OF EXPECTED YEARS OF USE

= $XX depreciation each year for p years.

Reducing balance method – a FIXED method for depreciation deducted from cost in the first year.
n
Formula : *In later years same percentage is taken of the reduced balance
s
r=1-
c *cost less depreciation already charged *
*also known as diminishing balance method or diminishing debit balance method.
n = bumber of years
~ formula used to find out the percentage to apply with
this
s = the net residual value (must be significant amount)

c = cost of the asset

method.
r = rate of depreciation to be applied

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