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Accounting Concepts
Term | Definition |
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Accounting Entity | The financial affairs of the business must be kept separate and distinct from the financial affairs of the owner. (Any personal expenses of the owner paid by the business must be recorded as drawings) |
Period Reporting | The life of a business is divided up into periods of equal length for reporting purposes. (So that the owner can measure the figures with those of previous periods, and trends can be identified- assists with decision making) |
Monetary Measurement | All transactions are measured in the same currency(the unit common to them all) |
Going Concern (Underlying Assumption) | States that the entity will continue to operate into the foreseeable future. This means the Balance Sheet values are at historical cost and not at current market value as there is no intention of selling or downscale. |
Accrual Basis (Underlying Assumption) | Transactions are recognised when they occur. They are recorded in the accounting records and reported in the financial statements of the accounting period to which they relate. |
Understandability | Information in financial statements must be understandable by users who have a reasonable knowledge of the business and a willingness to study the information with reasonable diligence. |
Relevance | Must be relevant to the decision making needs of users. |
Reliability | Free from material bias and error and can be relied and depended upon by users to faithfully represent what it represents. |
Comparability | Must be able to compare the results over time with those of other entities to identify trends. |
Tieliness | Information must be up to date and provided without undue delay or it will loose its relevance to decision making. |
Balance between cost and benefit | The benefits users receive from the information should out weigh the cost of getting that information. |
Balance between qualitative characteristics | Financial information preparers need to balance or trade off various qualitative characteristics in order to meet their goals. |
True and Fair View | Statements should be presented fairly and not be misleading. |
Revenue Expenditure | Is of a recurring nature and affect the Income Statement. |
Capital Expenditure | Is a one off type spending that usually creates an asset. (Includes transportation ad installation) |
Income Statement | Purpose- to calculate the profit/deficit for a given period of time. Limitations- depreciation, doubtful debts and does not include and non-financial information. |
Balance Sheet | Purpose- to report assets, liabilities and equity at a point in time. Limitations- accumulated depreciation, allowance for doubtful debts, no non-financial information, based on historical cost. |
Cash Flow Statement | Purpose- to report where the money was received from and what the money was spent on during the period. Limitations- does not show credit transactions or non-cash items. Based on past cash receipts and payments and does not show current cash obligations. |
Statement of Accounting Policies | To inform users of the financial statements about the policies. Includes the entity by name an nature, recognition of the use of the General Accepted Accounting Principles, other significant accounting policies and changes in accounting policies. |
Depreciation | Depreciation is the systematic allocation of the depreciable amount of the asset over its useful life. |