1. Year 12 Accounting Concepts Notes
15/10/2015
Accounting concepts
Mr. Barry
A-level Accounting Year 12
MR. BARRY

2. Year 12 Accounting Concepts Notes
15/10/2015
Learning objectives
Describe the assumptions that are made when recording accounting data
Explain what accounting standards are and why they exist
Explain how the concepts of accounting affect the recording and adjustment of accounting data
Mr. Barry
A-level Accounting Year 12
MR. BARRY

3. Year 12 Accounting Concepts Notes
15/10/2015
So far…
Recording has been based on certain assumptions which have deliberately not been discussed in detail.
Mr. Barry
A-level Accounting Year 12
MR. BARRY

4. Year 12 Accounting Concepts Notes
15/10/2015
Standards…
What does it mean?
Mr. Barry
A-level Accounting Year 12
MR. BARRY

5. Year 12 Accounting Concepts Notes
15/10/2015
Standards…
Businesses are often owned by more than just one person and the accounting statements produced are used by all.
If the financial statements were solely for the use of the owner then there would be no need to adopt a common framework for the presentation of the information contained within them.
Mr. Barry
A-level Accounting Year 12
MR. BARRY

6. Year 12 Accounting Concepts Notes
15/10/2015
Mr. Barry
A-level Accounting Year 12
MR. BARRY

7. One set of final accounts for all purposes
Year 12 Accounting Concepts Notes
15/10/2015
One set of final accounts for all purposes
Standardisation means that no matter which stakeholders want to see the financial statements they all see the same documents.
What problems are there with this?
What benefits are there which outweigh the problems?
Mr. Barry
A-level Accounting Year 12
MR. BARRY

8. Year 12 Accounting Concepts Notes
15/10/2015
A matter of trust
Because everyone receives the same trading and profit and loss account and balance sheet, in order to be of any use, all the various stakeholders have to believe that the assumptions upon which the financial statements are founded are based are valid and appropriate. If they don’t they wont trust the financial statements.
Mr. Barry
A-level Accounting Year 12
MR. BARRY

9. Year 12 Accounting Concepts Notes
15/10/2015
Activity
What would you value your text books at?
How would you value them?
How have you come to a consensus?
Mr. Barry
A-level Accounting Year 12
MR. BARRY

10. Objectivity and subjectivity
Year 12 Accounting Concepts Notes
15/10/2015
Objectivity and subjectivity
Valuing the books at what price you paid for them (based upon factual occurrence) is valuing assets objectively
Valuing the books at what you perceive to be their value (usefulness for exams) is subjective.
Subjective valuations seem right to the person who makes them but most other people would probably disagree with the value arrived at, because they may not see it as being objectively based.
Mr. Barry
A-level Accounting Year 12
MR. BARRY

11. Underlying accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Underlying accounting concepts
The historical concept:
Assets are normally shown at cost price, and that this is the basis for the valuation of the asset
the business entity concept:
The affairs of the business are to be treated as being quite separate from the non-business activities of the owners
The items recorded in the books of the business are, therefore, restricted to the transactions of the business. Activities of the owners are completely disregarded
Why?
The dual aspect concept:
There are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspects are always equal to each other
Mr. Barry
A-level Accounting Year 12
MR. BARRY

12. Underlying accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Underlying accounting concepts
the time interval concept:
Financial statements are prepared at regular intervals of the year. For internal management purposes they may be prepared far more frequently
Why?
Mr. Barry
A-level Accounting Year 12
MR. BARRY

13. Fundamental accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Fundamental accounting concepts
These comprise a set of concepts so important that they have been enforced through accounting standards/companies act
Mr. Barry
A-level Accounting Year 12
MR. BARRY

14. Fundamental accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Fundamental accounting concepts
Going concern concept
Implies that the business will continue to operate for the foreseeable future. It means that it is considered sensible to keep to the use of the historical cost concept when arriving at the valuations of assets.
What would happen if this concept was not used?
Mr. Barry
A-level Accounting Year 12
MR. BARRY

15. Year 12 Accounting Concepts Notes
15/10/2015
Going concern concept
A business drawing up their accounts on 31st December normally using the historical cost concept, the assets would be valued at £100,000. But it is known that the business will be forced to close down on February 2009 and the assets are expected to be sold for £15,000
In this case it would not make sense to keep to the going concern concept and so have to reject the historical cost concept.
In the balance sheet at 31st Dec 2008 the assets will be shown as £15,000
Mr. Barry
A-level Accounting Year 12
MR. BARRY

16. Examples where the going concern assumption should be rejected are:
Year 12 Accounting Concepts Notes
15/10/2015
Examples where the going concern assumption should be rejected are:
If the business is going to close down in the near future
Where shortage of cash makes it almost certain that the business will have to cease trading
Where a large part of the business will almost certainly have to be closed down because of a shortage of cash
Mr. Barry
A-level Accounting Year 12
MR. BARRY

17. Fundamental accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Fundamental accounting concepts
Consistency:
When a business has fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way (some concepts open to interpretation
Each business should try to choose the method that gives the most reliable picture of the business.
This cannot be achieved if one method is used one year and another the following year
Mr. Barry
A-level Accounting Year 12
MR. BARRY

18. Fundamental accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Fundamental accounting concepts
Prudence:
It is the accountants duty to see that people get the proper facts about a business. They should make certain that assets are not valued too highly and liabilities to low.
Otherwise someone may unadvisedly lend money to the business
The accountant should always show caution when dealing with uncertainty and make sure that financial statements are neutral. That gains and losses are not overstated and understated. This is known as prudence
Mr. Barry
A-level Accounting Year 12
MR. BARRY

19. Year 12 Accounting Concepts Notes
15/10/2015
Activity 10.2
Do you agree with the view that the prudence concept results in accountants producing financial statements that understate profits and gains and therefore present a value for capital that is lower than it should be?
Justify your answer
Mr. Barry
A-level Accounting Year 12
MR. BARRY

20. Fundamental accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Fundamental accounting concepts
Realisation:
Profit and gains can only be taken into account when realisation has occurred and that realisation occurs when the ultimate cash realised is capable of being assessed with reasonable certainty.
Recognising profit and gains now that will be 100% known in future periods is unlikely to mean that the correct amount has been recognised.
Misjudgements can arise when for example, profit is recognised in one period, only to discover later that this was incorrect because the goods involved have been returned in a later period because of defieciency
Mr. Barry
A-level Accounting Year 12
MR. BARRY

21. Fundamental accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Fundamental accounting concepts
Accruals concept:
Determining the expenses used up to obtain the revenues is referred to as matching expenses against revenues.
The key to the application of the concept is that all income and charges relating to the financial period should be taken into account without regard to the date of the receipt of payment
Mr. Barry
A-level Accounting Year 12
MR. BARRY

22. Fundamental accounting concepts
Year 12 Accounting Concepts Notes
15/10/2015
Fundamental accounting concepts
Materiality:
Do not waste your time in the elaborate recording of trivial items
If a box of paperclips was bought it would be used up over a period of time, and this cost is used up every time someone used a paper-clip. It is possible to record this as an expense every time a paper-clip is used but obviously, the price of a paper-clip is so small that it is not worth recording in this fashion, nor is the entire box of paperclips.
The paper-clips are not a material item and therefore the box would be charged as an expense in the period it was bought, irrespective of the fact that it could last for more than one accounting period
Mr. Barry
A-level Accounting Year 12
MR. BARRY