Accounting principles and concepts fully solved 2023

The going concern concept Financial statements are prepared on the assumption that the business will continue its operations for the foreseeable future; i.e. there is no need to sell off non-current assets The accruals concept Profit is the excess of revenue over expenses, not the excess of cash received over cash paid. Income and expenditure are recognised in the accounting period to which they relate, not the period in which cash is received or paid The prudence concept Caution should be exercised when making accounting judgements. Assets and profits are only recorded when they are certain; liabilities and expenses are recorded when they are probable. The materiality concept Financial information is important and must be included in the accounts if it would sway the opinion of the person reading it. The historic cost convention (UK GAAP) The value of assets shown on the statement of financial position should be based on their acquisition cost. Substance over form The economic substance of transactions and events must be recorded in the financial statements rather than just their legal form in order to present a true and fair view of the affairs of the entity. The consistency concept If a particular method of accounting is used to deal with a transaction, it should be applied consistently over time The business entity concept The transactions associated with a business must be separately recorded from those of its owners or other businesses Money measurement concept only transactions and events that are capable of being measured in monetary terms are recognised in the financial statements The understandability concept Transactions and events must be accounted for and presented in the financial statements in a way that is easily understandable by a user who possesses a reasonable level of knowledge of business, economic activities and accounting. If the end users cannot understand the information, the information cannot be dependable. The separate valuation principle assets and liabilities are valued separately to arrive at the figure presented in the statement of financial position The objectivity concept Financial statements must be relevant (helping users predict future trends of the business {predictive value} or confirming or correcting past predictions which have been made {confirmatory value}) as well as reliable (materially accurate and faithfully represents information) The realisation concept revenue is recognised when it is earned, whether cash has been received from the transaction or not The dual aspect concept each transaction has two aspects, both of which affect the statement of financial position. E.g. buying a car increases non-current assets and decreases the cash account The time interval concept Financial statements must be prepared regularly