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MANG1025 - Accounting Concepts Notes
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This is document contains notes and definitions of the accounting concepts and conventions. *Essential!! *Precise!! * For you!!
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Accounting Concepts and Conventions There are several origins of accounting regulations which include:
- Company law including the Companies Act 2006
- Financial Reporting Council
- European Union (for the moment)
- International Accounting Standards Board
- Financial Services Authority and Stock Exchange
- HMRC and the taxation system
Duality
This underpins double entry book-keeping, and is manifested in Dr and Cr entries
It reflects the dual nature of transactions for every action, there is an equal and
opposite effect
For every Dr there is a Cr and for every Cr there is a Dr
Business entity
The business entity concept dictates that the transactions, assets and liabilities that
relate to an entity are accounted for separately from those of the owners
- This separation is obvious for larger businesses, but less easy to distinguish for small
businesses
Accruals basis of accounting
Under the accruals basis of accounting basis, the effects of transactions and other
events are recognised:
- when they occur (and not as cash or is received or paid)
- they are recorded in the accounting records and reported in the financial statements
of the periods to which they relate
Accruals involves matching revenues and costs which implies:
- Assets are included in the Statement of Financial Position at values based on cost,
not at break up values
i.e. Non-Current Assets are depreciated
- Revenues and profits are recognised when the transactions occur rather than when
the associated cash flows happen
i.e. Trade Payables and Trade Receivables are recognised for purchases and sales that
are made on credit
Going concern
The financial statements are normally prepared on the assumption that an entity is a
‘going concern’
This is an assumption that they will continue to operate for the foreseeable future
Assets and Liabilities are included in the Statement of Financial Position at values
based on cost, not at break up values i.e.
- Non-Current Assets are depreciated
- Inventories are held at the lower of cost and net realisable vales (in the normal sales
process)
- Trade receivables are held at historic cost, rather than debt factoring values
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