Pearson Edexcel A Level Accounting (IAL AS) Accounting Concepts & Conventions.pptx

International Accounting Standards/Accounting Concepts & Conventions

1. ACCOUNTING CONCEPTS & CONVENTIONS Presented by Surekha V S Grade 11C BAEC

2. Explain the purpose of accounting concepts Understand the meaning of different accounting concepts and conventions Explain and evaluate the use of International Accounting Standards (IAS). Learning Outcome

3. Going Concern Concept Business has a perpetual/indefinite life Assumes that the business will continue to trade for the foreseeable future Inventory will appear at lower of cost/NRV In SFP, NCA are recorded at its Net Book Value/ charging depreciation on NCA

4. Prudence/conservatism ‘Never anticipate a profit, but provide for all possible losses’ Ensure that profits and assets are not overstated and that liabilities are not understated. It also ensures the true & fair view of the business provision for depreciation on non- currents assets; creation of provision for doubtful debts. recording the inventory at cost lower of cost and net realizable value

5. Matching/Accrual Concept The revenue of the accounting period is matched against the costs of the same period (the timing of the actual receipts and payments is ignored) Calculates profit for the year on the basis of the difference between revenues and expenses for the year rather than the difference between cash receipts and expenditures. Examples of application of matching concept includes: 1. Adjusting for accruals and prepayments Provision for depreciation on non- currents assets; Creation of provision for doubtful debts.

6. Consistency Concept Ins ist that the business should apply the same policies and procedures from one year to the next. E.g. depreciation Similar accounting policies to similar items should be followed consistently once adopted Seeks to avoid distortion in the preparation of accounts

7. Historic Cost Concept Record all assets at its cost and not at its realisable value or market value All assets and expenses are initially recorded in the ledger accounts at their actual cost. It is closely linked to the money measurement principle. Cost is a known fact and can be verified.

8. Money Measurement Concept only monetary transactions can be recorded in the books of accounts . Eg : morale of the workforce the effectiveness of a good manager the benefits of a staff training course the launch of a rival product or increased competition sincerity, loyalty & honesty of employees

9. Business Entity/Accounting Entity Business & the owner are separate entities. Business is distinct from the owner. Owners private affairs cannot be recorded in the business Only the transactions which affects the business should be recorded from the view point of the business

10. Examples: Any amount invested by the owner in the business will be regarded as capital Any amount withdrawn by the owner from the business for personal use will be treated as drawings , rather than an expense of the business. T his concept help s to show a true and fair view of the financial position of the business

11. Materiality Concept Only record significant expenses, e.g. paper clips wouldn’t be recorded . Accountant should not spend time trying to accurately record items that are immaterial . Small value items will be charged to a single accounting period although their benefit may exist for a number of accounting periods. The level of materiality will depend upon the size of the business to the point at which the transaction does not distort the profit and a true and fair view still exists

12. Realization Concept Ensures that revenue should only be recognized when the exchange of goods or services takes place The revenue is regarded when it is realized as the legal title to the goods passes to the customer

13. Use of accounting concepts and conventions provides a common framework/yardstick applied by all businesses for the preparation of accounts . Ensures consistency of approach when different businesses use the same concepts Ensures greater accuracy in the calculation of profit for a period when the expenses and incomes have been calculated using Rely on the information. Stakeholders can have trust and faith in the published financial statements of the business to be used for their assessment of the business

14. Evaluate the Use of Accounting Concepts & Conventions Positive Points Financial statements can be compared from business to business, even between countries, different periods of the same business as the financial statements are prepared using the same concepts and conventions. Concepts and conventions are the result of past experience and best practice. Overall, the financial statements give a true and fair view of the business performance and position.

15. Against Points Concepts and conventions are often open to interpretations and different business may take different interpretations when preparing their accounts. Eg : materiality may be interpreted by different businesses differently. Concepts and conventions can on occasions be contradictory e.g. it may be consistent to use straight line depreciation but not prudent in the early years of a non-current assets life when depreciation is high. The application of concepts and conventions requires skilled in accounting approaches therefore there is a cost implication. Do not incorporate non-financial factors

16. Evaluate the use of international Accounting Standards (IAS) in the preparation of FS Provides a common international standard which can be applied across the world Stakeholders can rely upon the validity of figures in the statements Greater accuracy of reporting in statements prepared in the same format Enables comparisons to be made. Financial statements can be compared from business to business, even between countries, different periods of the same business as the financial statements are prepared using the same standard.

17. Against IAS Only legally applies to corporate bodies Requires trained accounting staff to apply Cost of implementation will be higher NOT just time consuming on its own Non-financial factors are not included in IAS accounting Standards can be contradictory

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