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ACCOUNTING CONCEPTS and PRINCIPLES

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ACCOUNTING CONCEPTS and PRINCIPLES Accounting concepts ( ) Recording has been based on certain assumptions.( ) e.g. – PowerPoint PPT presentation

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Title: ACCOUNTING CONCEPTS and PRINCIPLES


1
ACCOUNTING CONCEPTSandPRINCIPLES
  • ???????

2
Accounting concepts(????)
  • Recording has been based on certain
    assumptions.(??)
  • e.g.
  • Can we made depreciation using straight line
    method for 2001, but using reducing balance
    method for 2002, using revaluation method for
    2003???

3
One set of final accounts for all purposes
  • Copies of the same set of final accounts are
    given to all the different people.

4
True and fair concept
  • A firm should disclose all significant
    information in the financial statements to the
    concerned parties so that the users may have a
    true and fair view of the state of affairs of the
    firm.

5
The need for objectivity(???)
  • Financial accounting ensures objectivity by using
    generally agreed methods in preparing financial
    statements. This helps to provide objective,
    uniform and useful accounting information for
    different user.
  • (???????, ????????????)

6
Accounting Concepts
  • Money measurement concept (??????)
  • The going concern concept (??????)
  • The business entity concept (??????)
  • The realisation concept (????)
  • Accrual /Matching concept(????)
  • Materiality Concept(??????)
  • Prudence/Conservaitsm Concept(?????)
  • Consistency Concept (?????)
  • Historical Cost Concept (???????)

7
Money measurement concept(??????)
  • It can be measured in money
  • Most people will agree to the money value of the
    transaction.
  • Assumes that the value or purchasing power of
    money is constant, ignoring the effects of
    inflation or deflation.(??/??)

8
Money measurement concept(??????)
  • e.g.
  • Accounting doesnt tell how good the quality of
    employees skills are although this is important
    for the success of a business.

9
The Going concern concept (??????)
  • This concept implies that the business will
    continue to operate for the foreseeable future.
  • This is why we use the historical cost concept
    and ignore the current market value in asset
    valuation.

10
The Going concern concept (??????)
  • e.g.
  • Fixed assets are shown at cost less accumulated
    depreciation.

11
The Business entity concept(??????)
  • This concept implies that the affairs of a
    business are to be treated as being quite
    separate from the non-business activities of its
    owners.
  • Personal transactions of the owner should not be
    included.

12
The Business entity concept(??????)
  • e.g.
  • A directors private car should not be included
    in the fixed assets of the company.

13
The Realisation concept(????)
  • This concept holds to the view that profit can
    only be taken into account when realisation has
    occurred.
  • Generally, sales revenue arising from the sale of
    goods is recognised when the goods are delivered
    to the customers.

14
The Realisation concept(????)
  • e.g.
  • Profit is earned when goods or services are
    provided to customers. Thus it is incorrect to
    record profit when order is received, or when the
    customer pays for the goods.

15
Accrual concept(????)
  • The accrual concept says that net profit is the
    difference between revenues and expenses.
  • Determining the expenses used up to obtain the
    revenues is referred to as matching expenses
    against reveues.
  • Income and costs are recognised as they are
    earned and incurred but not as they are received
    or paid.

16
Accrual concept(????)
  • e.g.
  • Expenses have to take into account of amounts
    payable at the end of an accounting year even
    though the cash has not yet been paid.

17
Materiality Concept(??????)
  • Financial statement should separately disclose
    significant items for they would influence
    decisions of users.
  • Accounting does not serve a useful purpose if the
    effort of recording a transaction in a certain
    way is not worthwhile.
  • In other words do not waste your time in the
    elaborate recording of trivial items.

18
Materiality Concept(??????)
  • e.g.
  • A stock of stationery worths 10 should be
    treated as an expense when it was bought.

19
Prudence/Conservaitsm (?????)
  • The accountant should always be on the side of
    safety.
  • The prudence concept means that normally he will
    take the figure which will understate rather than
    overstate the profit.
  • Provision is made for all known liabilities.

20
Prudence/Conservaitsm (?????)
  • E.g.
  • Provision for doubtful debts should be deducted
    from debtors in balance sheet.

21
Consistency(?????)
  • When a firm has once fixed a method for the
    accounting treatment of an item, it will enter
    all similar items that follow in exactly the same
    way.
  • Frequent changes in the accounting methods would
    lead to misleading profits calculated from the
    accounting records.
  • It states that when a firm has chosen a method
    for the accounting treatment of an item, all
    similar items should be treated in the same way.

22
Consistency(?????)
  • E.g.
  • Depreciation method of certain fixed assets once
    adopted should be used in the following years.

23
Historical Cost concept(???????)
  • Assets are normally shown at their original costs
    of acquisition.
  • Any changes in the market value after the
    purchase are ignored.
  • Historical cost is the most objective measure of
    the value of an asset. However, it cannot reflect
    the current value of an asset.

24
Historical Cost concept(???????)
  • E.g.
  • A fixed asset acquired at a cost of 100,000
    would be recorded at this amount in the books.
    Even if its market value may have gone up or down
    in future, it should be recorded at its original
    cost 100,000.

25
Exercises
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