Accounting Concepts

A LEVEL ACCOUNTING
ACCOUNTING PRINCIPLES, CONCEPTS AND CONVENTIONS

1) BUSINESS ENTITY
It states that the business transactions should be separated with that of its owner/s.
Thus for accounting purposes, the business is a legal entity divorced from the personal
affairs of its owners/shareholders.
Implications/Application
Resources taken from personal owner are treated as drawings hence, it would
diminish the resources introduced by the owner (capital/ owners’ equity). Similarly, any
resources introduced by the owner is owed to the owner through the opening of a
capital account. Capital is the only form of liability owed by the business to its owner/s.
2) HISTORIC COST CONCEPT.
It states that assets should be shown at the value at which they were purchased or
acquired. Similarly liabilities are shown at the value at which they were on the day of
the transaction.
Implication/ application
Assets are shown in the statement of financial position at their cost values. Interest
accrued from non-current liability does not increase the value of the liability.
Advantages of complying with Historic Concept
 It enhances objectivity in recording and interpreting business transactions
 It is easily understand
 Double entry system is easily applied
 External auditors will easily understand and verify business transactions
 It is accepted by tax authorities
Disadvantages of using historic cost concept
 Profits may be overstated by failing to adjust assets for increased cost of replacing
them
 Non-current assets may be understated hence owner’s equity may also be
understated. This can be offset by revaluing the assets.
However, non-current assets may be shown at fair value if they can be measured and
ascertained reliably.
3) Money measurement concept
Business can only record a transaction if it can be expressed in monetary terms. That
is, a value should be attachable to a transaction in terms on money for it to be recorded
in the books of accounts.
ATM ACCOUNTING CONCEPTS CHINGS 0772705459

Implications /application
The following items are not recorded in the books of accounts due to their qualitative
nature
 Skills of workers
 Level of motivation of employees
 Competencies of the management
 Good customer care
 Good after sales service

4) Going concern concept
The financial statements are prepared on the assumption that the business will
continue to operate for the foreseeable future. As such, the best has no intention of
liquidating nor cease trading in the foreseeable future
Implications and Application
Non-current assets are shown as carrying values (net book value) not at the value
they will fetch when sold.
5) Consistence concept
It is an accounting concept which says companies should use the same accounting
treatment for all similar transactions or business items over time.
Advantages
It makes comparison of trading performances possible and increase the degree of
objectivity. Without this concept, trends are difficult to determine.
Implication and application
Rate and method of charging depreciation should not be changed at regular interval
unless there is a solid reason to do so.
6) Prudence concept
Revenue and profits should only be accounted for when they are realised or their
realisation is certain. As such, assets and profits should not be overstated while
expenses and liabilities should not be understated.
Application and implications
Where loss in anticipated, it should be accounted for. For instance, if there is possibility
of bad debts, a provision for doubtful debts should be provided in the financial
statements

Profit should only be accounted for when realised. Hence, manufacturing profit
should be added back to operating profit in the income statement. After being debited
in the manufacturing account.
7) Realisation concept
Revenue should only be recognised when the title of the goods is passed to customer
not when money change hands.
Application and implication
Goods send on sale or return basis is treated a part of the closing inventory of the
sender as long as the potential customer is yet to accept them .
Similarly, an advance payment of goods by a customer should not be treated as a sale
unless the goods have delivered to the customer.
8) Duality
Every business transaction affect two business items simultaneously. As such, one
item is credited while another is debited.
The statement of financial position is prepared using the accounting equation which is
premised on the Duality Concept.
9) Materiality Concept
This concept advise firms to disregard accounting principles for immaterial business
items or insignificant ones. Trying to correctly following the ideal accounting treatment
of some items may be a waste of time and resources hence, normal accounting
treatment is disregarded.
Implication and application
Small items which should be treated as non-current assets may be written down in the
income statement as revenue expenditure even though they are non-current assets.
For instance staplers, pins, and papers clips may be treated as revenue items because
ascertaining depreciation of such items may be too costly to do.
10) Matching Concept/ Accrual Concept
The revenue generated by the business during a particular financial period should be
matched with expense of the same period.
 Accrued revenue and expenses for the current financial period should be part of
the current income statement items.
 Similarly, prepaid expenses and revenue received in advance should not be
accounted for as expenses and revenue of the current income statement

11) Substance over form
This accounting concept observes the commercial substance of some business items
while ignoring their legal form.
Implications and applications

Non-current assets purchased on hire purchase belongs to the buyer after paying
the last instalment but for accounting purposes they are treated as part of the
purchaser’s business assets hence, shown in the statement of financial position.
Non-current assets leased are shown in the books of account in adherence to this
accounting concept.

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Accounting Concepts

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A LEVEL ACCOUNTING

ACCOUNTING PRINCIPLES, CONCEPTS AND CONVENTIONS

ATM ACCOUNTING CONCEPTS CHINGS 0772705459

ATM ACCOUNTING CONCEPTS CHINGS 0772705459

ATM ACCOUNTING CONCEPTS CHINGS 0772705459

Implications and applications

ATM ACCOUNTING CONCEPTS CHINGS 0772705459

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