Concept Example

Materiality Concept Items such as stationery/ calculators will

Applies to items of very low value which be charged in the period that they are
are insignificant to decision making. purchased although inventory of
Cost of time to record such low value items stationery from that purchase may remain
would outweigh the cost of the item. for future financial periods.

Business entity concept Payments made for the owner’s benefit

The financial transactions of the business must be shown as drawings in the
must be kept separate from the financial accounts.
transactions of the owner.

Money measurement concept Some assets to the business such as

Recognises that some assets cannot be people’s skill cannot be recorded on the
measured in monetary terms and not SOFP.
included in the financial statements.
Prudence Allowance for irrecoverable debts,
The income statement must give a true and fair depreciation.
view of incomes and expenditure for the
period. All expenditures must be included if there
is a good chance that they will impact
profit/Show all anticipated losses and
expenses. Profits/Current assets/Trade receivables
must not be overstated.
The concept ensures that profits/surplus
and assets are not overstated and the
liabilities are not understated.

Consistency e.g calculate depreciation.

Same approach should be used from period to
period to e.g calculate depreciation. Treat
similar items in the same way.
This will avoid a distortion of the profit
calculation.
Historical Cost
Although market value may change the cost
must be applied to the asset as this is known
Realisation
Profit is not realised until the sale is
confirmed by the customer.
Accrual Concept Example: Wages, subscriptions, rent,
The concept which matches the rates and insurance, depreciation.
expenses for an accounting period to the
income for the same accounting period.
Annual depreciation charge
Non-current assets will reduce in value in
an accounting period and this therefore
must be accounted for as an expense of
the business.
Allowance for irrecoverable debts
It is probable that not all the existing
trade receivables will be able to pay
their debts.
Accounting ethics
Businesses should report with honesty
and integrity. Not misleading by issuing
inaccurate statements or financial
statements.
Example
An appropriate method for each non-
current asset must be selected and
consistently applied.
Example
There will be a certain number of debts
which are irrecoverable. An estimate,
usually in percentage terms, will be
made and this will be deducted from the
gross value of the trade receivables in
the SOFP.
Example
Not withholding relevant information
such as potential lawsuits, sudden value
changes of non-current assets, or major
barriers to the business in the future which
could not reasonably be foreseen by a
stakeholder.