Chapter 11 Accounting Concepts Students

Book-keeping Accounting concepts

Chapter 11

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Objectivity and subjectivity A value that everyone agrees to because it is based upon a factual occurrence is said to be objective. Using one’s own judgement to arrive at a value is said to be subjective.

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International Accounting Standards The need for an IASB has mainly been due to: - Considerable growth in international investment. - Growth in multinational firms. - Countries are developing their own standard-setting bodies. - Some countries cannot afford a standard-setting body of their own.

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Basic accounting concepts

- Historical cost concept - Money measurement concept - Business entity concept - Dual aspect concept

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1. Historical cost concept

Assets Assets are are normally normally shown shown at at cost cost price price and and this this is is the the basis basis for for valuation valuation of of the the asset asset

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2. Money measurement concept

Accounting Accounting is is concerned concerned only only with with these these facts: facts: ItIt can can be be measured measured in in money money (£, (£, €€ or or $), $), and and most most people people will will agree agree to to the the ‘monetary’ ‘monetary’ value value of of the the transaction transaction

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3. Business entity concept

Concerning Concerning only only transactions transactions that that affect affect the the firm, firm, separate separate from from the the personal personal activities activities of of it’s it’s private private owner. owner. Only Onlytwo twotransactions: transactions: --introduction introductionof ofnew newcapital capital --drawings drawings

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma

Balance Balancesheet: sheet: increase increaseof ofCapital Capital decrease decreaseof ofCapital Capital

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4. Dual aspect concept

Dealing Dealing with with both both aspects aspects of of aa transaction. transaction. The The concept concept states: states:

Assets Assets == Capital Capital ── Liabilities Liabilities

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4. Dual aspect concept Assets Assets == Capital Capital ── Liabilities Liabilities

Separate Separate accounts accounts One One aspect: aspect: debit debit entry entry Other Other aspect: aspect: credit credit entry entry Double entry method: each transaction will get a debit and a credit entry on different accounts

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Other important accounting concepts Going Going concern concern Consistency Consistency Prudence Prudence Realisation Realisation Accrual Accrual concept concept Separate Separate determination determination Substance Substance over over form form

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Exercise 11.2 (a) accounting concepts When When preparing preparing the the final finalaccounts accountsof of your your company, company, name name the theaccounting accountingconcepts conceptsyou youshould shouldfollow followto to deal dealwith with each eachof of the thefollowing: following:

(a) (a)Electricity Electricityconsumed consumedduring duringthe theaccounting accountingperiod periodisisstill stillunpaid unpaid at atthe theyear yearend. end.

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Exercise 11.2 (b) accounting concepts (b) (b)The Theowner ownerof ofthe thecompany companyhas hasinvested investedher herprivate privateassets assetsin in the thecompany company

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma

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Exercise 11.2 (c) accounting concepts (c) (c)AAdebtor debtorwho whoowes owesthe thecompany companyaalarge largeamount amounthas hasbeen been declared declaredbankrupt, bankrupt,and andthe theoutstanding outstandingamount amountdue dueto tothe the company companyisisnow nowconsidered consideredto tobe beirrecoverable irrecoverable

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Exercise 11.2 (d) accounting concepts (d) (d)The Thecompany companyhas hassuffered sufferedsubstantial substantiallosses lossesin inthe thepast pastfew few years, years,and andititisisextremely extremelyuncertain uncertainwhether whetherthe thecompany companycan can continue continueto tooperate operatenext nextyear. year.

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Assumption of stability of monetary measures

Bought Bought 20 20 years years ago ago aa building building against against historical historical cost cost of: of: Built Built nowadays nowadays an an identical identical building: building: Total Total costs costs

₤₤ 200.000 200.000 ₤₤ 400.000 400.000 ₤₤ 600.000 600.000

₤ 600.000 Is historically correct but with time interval of 20 years? Problem is time value of money!

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End of Chapter 11 Accounting concepts

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 2007

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