ACCOUNTING 12:

CHAPTER 10

Accounting Rules
Why are accounting rules important or necessary?
 It would be easier to understand the financial
position of a business.
 It would be easier to make comparisons between the
financial reports of 2 or more businesses
What are accounting principles?
 Are referred to as concepts and conventions
 A concept is a rule which sets down how the
financial activities of a business are recorded.
 A convention is an acceptable method by which the
rule is applied to a given situation.
 What are the different Accounting principles?
Business entity or Accounting entity: the business is treated as
being completely separate from the owner of the business.
Duality (dual aspect principle): keeping a double entry of
records
Money measurement: only information which can be expressed
in terms of money can be recorded in the accounting records.
Realization: do not record profit until it has been actually
earned. Profit is regarded as being earned when the legal title
to goods or services passes from the seller to the buyer.
 What are the different Accounting principles?
Consistency: the business must use a selected
accounting method all throughout form one period to the
next.
Accruals (matching principle): the revenue of the
accounting period is matched against the costs of the
same period.
Prudence (principle of conservatism): profits and assets
are not overstated and liabilities are not understated.
“Never anticipate a profit, but provide for all possible
losses.”
 What are the different Accounting principles?
Going Concern (Assumed Continuity): it is assumed that
the business will continue to operate for an indefinite
period of time and that there is no intention to close down
the business or reduce the size of the business by any
significant amount.
Materiality: applied to items of very low value which are
not worth recording as separate items. Small expenses
are entered in one account known as “general or sundry
expenses”
 What are the different Accounting principles?
 Historical cost: all assets and expenses are recorded in
the ledger accounts at their actual cost.
 Accounting period: financial statements must be
prepared for each time period and transactions are
regarded as occurring in either one period or another.
The life of the business is divided into accounting
periods (years) to allow comparisons.
 Objectives in Selecting Accounting Policies

RELEVANCE
Information about the business’s Capable of being depended upon by
financial performance and
position can be used:
to confirm, or correct prior
expectations about past
events.
To help forming, revising, or
confirming expectations about
the future.
RELIABILITY
users as being a true representation of
the underlying transactions and events
which it is representing.
 Capable of being independently verified.
 Free from bias
 Free from significant errors
 Prepared with suitable caution being
applied to any judgments and estimates
which are necessary
 Objectives in Selecting Accounting Policies
COMPARABILITY UDERSTANDABILITY
Information about the business’s financial
statements can be useful: It is important that financial
statements can be understood
If it can be compared with similar information by users of the statements.
about the same business for another Understandability depends on:
accounting period
Clarity of the information
To be able to compare the information with
similar information about other businesses Ability of the users
It is important to be able to identify
similarities and differences between the
information in the financial statement and the
information relating to other accounting
periods or other businesses.
 CAPITAL AND REVENUE
EXPENDITURES
 Capital Expenditure: the money spent by the business on
purchasing non-current assets and improving or extending
non-current assets.
 Ex: cost incurred in the purchase, cost of carriage, cost of
installation
 Revenue Expenditure: the money spent on running the
business on a day-to-day basis.
 Ex: admin expenses, selling expense, financial expenses
maintenance and running costs of non-current assets
 CAPITAL AND REVENUE RECEIPTS
 Capital Receipt: the money the business gets on selling
non-current assets.
 Revenue Receipt: the money the business gets on sales and
other incomes
 Ex: rent received, commission received, discount received
 INVENTORY VALUATION
 Closing inventory from the previous year becomes the
opening inventory at the start of the new financial year.
 Incorrect entry of inventory will affect the business’s gross
and net profits.
 Incorrect values will also show in both the current assets
and capital in the balance sheet.
 Inventory is always valued at the lower of cost or net
realizable value (principle of prudence).
 INVENTORY VALUATION
 The cost of the inventory is the actual purchase price plus
any additional costs incurred in bringing the inventory to its
present position and condition.
 The net realizable value is the estimated receipts from the
sale of the inventory, less any costs of completing the
goods or costs of selling goods.
 EXAMPLE 10.1
Devnani Traders sell two different types of goods. (types A and
B). They provide the following information at 31 December 20-6

Type Units Cost price per unit ($) Net realizable value
per unit ($)
A 94 $20 $18
B 38 $15
$19
Calculate the value of the closing inventory of Devnani Traders at 31
December 20-6.
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