Principles of accounts

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Accounting Concepts

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OBJECTIVES : State the accounting concepts Give examples of transactions which follows the accounting concepts

Why have accounting concepts? : 

Why have accounting concepts? All transactions are recorded based on these concepts so that: Records are consistent and figures are accurate and fair.

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Accounting concepts/ principles Accounting Entity/ Business Entity Accounting Period Money measurement Going Concern Consistency Objectivity Historical Cost Prudence/ Conservatism Accrual Matching

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Accounting Entity/ Business Entity The business is kept separate from the owner. The owner’s personal transactions are not recorded in the books. Capital Drawings Owner Business Example: When the owner invests or withdraws from the business, these are recorded as capital and drawings.

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Accounting Period Concept The life of the business is divided into periods, eg monthly, yearly, half-yearly, etc. Allows meaningful comparison of the business over the same period. Example: The profit and loss is calculated for the year, or half year or the month.

Money Measurement Concept : 

Money Measurement Concept Records only transactions which can be measured in money terms. Exclude other assets like “ good reputation, hardworking employees, etc because these can’t be quantified in money terms.

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Going Concern Concept The business is assumed to continue operations for an infinite period of time. Business Need to calculate balance c/d and b/d For the next period

Consistency Concept : 

Consistency Concept Choose the same method of treatment for items to allow meaningful comparison. Examples: Consistent methods of valuing stock. Consistent methods of finding depreciation.

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Objectivity Concept Transactions recorded must be true and fair Record transactions based on source documents. Source documents provide proof of transaction. Examples: Sales and purchases of goods are recorded based on prices stated in the invoices. Claims for taxi must be supported by original receipts.

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Historical Cost Concept All business transactions are recorded at actual cost price (original price / historical cost) Why ?? Assumed that assets bought are for use in the long term and not for sale

Prudence/Conservatism : 

Prudence/Conservatism Choose the method of treatment which will give a lower profit lower asset value. higher liabilities higher expenses So that profits/ asset values will not be overstated.

Historical Cost Concept : 

Historical Cost Concept Examples: The cost of a factory is recorded as $50,000 which is the price at which it was sold. The value of the factory may increase after many years but the cost in the business books’ are not changed. Only when the factory is going to be sold, it will be revalued.

Prudence/Conservatism : 

Prudence/Conservatism Examples: Stock is valued at LOWER of cost or net realizable value. Include possible losses but not gains., eg provision for bad debts. Provide for depreciation so that fixed assets will not be overstated

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Accrual concept Expenses that are owing/unpaid are termed as accrued expenses Revenues are recorded when it is earned and not on cash basis. Expenses are recorded when it is incurred and not on cash basis.

Accrual concept : 

Accrual concept Examples: Sales on credit, ie debtors are recorded in the period goods are sold/ services provided and not when cash is received. Purchases on credit, ie creditors are recorded in the period goods are purchased/ services used and not when cash is received. Wages for the month of Dec 2006 must be recorded as expenses in 2006 even thought it may be paid in January 2007.

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Matching Principle All costs related to earning the revenue much be matched and recorded in the same period. this will give an accurate profit. Examples: Sales of goods are recorded in the same period where these same goods are purchased. Expenses related to earning the service eg salesmen commission must be recorded in the same period where the revenue is earned.

Assignments : 

Assignments Complete the Online MCQ Worksheet