Accounting Concepts, Conventions and Solutions
Table of Contents QUESTION ONE: Accounting Concepts and Conventions 1 a) Accounting Concepts 1 i) The going concern concept. 1 ii) The accruals concept (or matching concept) 1 iii) The entity concept: 3 iv) The money measurement concept: 3 v) The historical cost concept: 4 vi) The realization concept: 4 vii) Duality concept: 4 b) Accounting conventions 5 QUESTION TWO: Clashing accounting concepts and conventions that might bring about inconsistency in the accounting process 9 1. Clash between the accruals/matching concept and the prudence convention 9 2. Clash between the historical cost concept and Prudence convention 9 QUESTION THREE: Solutions to the clashing accounting concepts and conventions 11 REFERENCES 13
QUESTION ONE: Accounting Concepts and Conventions a) Accounting Concepts
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business enterprises. They outline the rules of accounting that should be followed in preparation of all financial statements. These concepts are outlined in the International Accounting Standard 1(IAS 1)-presentation of financial statements. The word ‘concept’ in this context means an idea or thought that has a universal application. This includes; i) The going concern concept: implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.
Financial statements should be prepared under the going concern basis unless the entity is being (or is going to be) liquidated or if it has ceased (or is about to cease) trading. The directors of a company must also disclose any significant doubts about the company’s future if and when they arise.( Agatha,2010)
The main significance of the going concern concept is that the assets of the business should not be valued at their ‘break-up’ value, which is the amount that
QUESTION ONE: Accounting Concepts and Conventions a) Accounting Concepts
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business enterprises. They outline the rules of accounting that should be followed in preparation of all financial statements. These concepts are outlined in the International Accounting Standard 1(IAS 1)-presentation of financial statements. The word ‘concept’ in this context means an idea or thought that has a universal application. This includes; i) The going concern concept: implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.
Financial statements should be prepared under the going concern basis unless the entity is being (or is going to be) liquidated or if it has ceased (or is about to cease) trading. The directors of a company must also disclose any significant doubts about the company’s future if and when they arise.( Agatha,2010)
The main significance of the going concern concept is that the assets of the business should not be valued at their ‘break-up’ value, which is the amount that
References: 1. Agatha J., Mengyu and W.,Askew S.,(2010). "The Switch from US GAAP to IFRS" 2. Arens A., and Loebbecke, J., "Auditing, an integrated approach", 1980 Prentice Hall 4. Crovitz, L. (2008). "Closing the Information GAAP". The Wall Street Journal vol III 6. Pixley, Francis William: Accountancy—constructive and recording accountancy (Sir Isaac Pitman & Sons, Ltd, London, 2002) 7. Williamson, D. (2001), Accounting Business Spreadsheeting, Prentice Hall, London