AccountingConcepts-businessatgrosvenor.docVIP

Accounting Concepts Why are accounting concepts needed? The accounts of a business should reflect a ‘true and fair’ value of its financial position. To achieve this, accountants apply a series of rules or ACCOUNTING CONCEPTS By using agreed concepts when analysing and presenting financial data, accountants can avoid confusion and inconsistency, and there is less scope for presenting misleading information. Also, the accounts of different companies can be compared more easily. There are several accounting concepts we must consider: ACCRUALS/MATCHING concept (see other handout) Revenue should be recognised when it is earned, not when it is received. This means, if we sell goods on credit in December, but don’t receive payment until February. We should record the sale as revenue in December. The same principle applies to costs incurred by the business. Costs should be recognised when they are incurred, not when the money is actually paid. GOING CONCERN CONCEPT (also known as the ‘Historical Cost Concept’) This assumes that a business will carry on trading for the foreseeable future, and is not expected to close down or be sold. This is important when valuing a firms assets. If the firm is a going concern then the assets can be valued at their historical cost (the price originally paid). However, if the firm was to be closed down, then assets should be valued at their ‘break-up’ value. This is the value they would receive if they sold the assets, so really a second hand price. This would probably be lower then the historical cost, apart from property or land which could well be worth more. Inflation can create problems. It is a general and persistent rise in prices. Because it causes land and property prices to rise, the historical cost of these assets is likely to be less then their current value. For this reason, business sometimes arrange for a professional revaluation of these assets in order to reflect a ‘true and fair view’ of what they are worth. Ex