BUSI 1010U Lecture Notes - Accrual

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29 Jan 2013
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Accounting Concepts
Four important accounting concepts underpin the preparation of any set of accounts:
Going
Concern
Accountants assume, unless there is evidence to the contrary, that a
company is not going broke. This has important implications for the
valuation of assets and liabilities.
Consistency
Transactions and valuation methods are treated the same way from year to
year, or period to period. Users of accounts can, therefore, make more
meaningful comparisons of financial performance from year to year. Where
accounting policies are changed, companies are required to disclose this
fact and explain the impact of any change.
Prudence
Profits are not recognised until a sale has been completed. In addition, a
cautious view is taken for future problems and costs of the business (the are
"provided for" in the accounts" as soon as their is a reasonable chance that
such costs will be incurred in the future.
Matching (or
"Accruals")
Income should be properly "matched" with the expenses of a given
accounting period.
Key Characteristics of Accounting Information
There is general agreement that, before it can be regarded as useful in satisfying the needs of
various user groups, accounting information should satisfy the following criteria:
Criteria
What it means for the preparation of accounting information
Understandability
This implies the expression, with clarity, of accounting information in
such a way that it will be understandable to users - who are generally
assumed to have a reasonable knowledge of business and economic
activities
Relevance
This implies that, to be useful, accounting information must assist a user
to form, confirm or maybe revise a view - usually in the context of
making a decision (e.g. should I invest, should I lend money to this
business? Should I work for this business?)
Consistency
This implies consistent treatment of similar items and application of
accounting policies
Comparability
This implies the ability for users to be able to compare similar companies
in the same industry group and to make comparisons of performance over
time. Much of the work that goes into setting accounting standards is
based around the need for comparability.
Reliability
This implies that the accounting information that is presented is truthful,
accurate, complete (nothing significant missed out) and capable of being
verified (e.g. by a potential investor).
Objectivity
This implies that accounting information is prepared and reported in a
"neutral" way. In other words, it is not biased towards a particular user
group or vested interest