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Chapter 2

chapter 2.docx

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ACCT 301

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Chapter 2 Just a basic summary of those little things that we always tend to forget. The Going Concern Concept implies that a business is a going concern, i.e. that there is no reason to expect the liquidation of assets. Thus, the business may be valued at its historical, or current cost, rather than its break-up or replacement value. A further example to illustrate the application of the Going Concern concept, may be clearly seen, when stock is valued. It is a practice to value stock at the lower of its net realizable value or cost of purchase, this is because the going concern concept implies that the stock is held to be sold at a future date. The Accruals Concept is based on several ‘ideas’ or practices, which may be clearly illustrated, if summarized in the following form: 1. Revenue and Costs must be recognized as they are earned or incurred. 2. Revenues must be matched with costs, and vice versa, and dealt with in the profit and loss account of the period to which they relate. It is for this reason, that we actually disclose the value of the creditors in the Balance Sheet, and the value of debtors. Furthermore, although we may have paid rent of BD 1000, for the next two years for example, we may only note the amount relevant to this year’s profit and loss account, and the remaining balance, as a prepayment in the Balance Sheet. Furthermore, this is the reason why it is required to account for sales and purchases when made, even though on credit, rather than when they are paid for. As well as this, the figure for closing stock is also deducted from the figure of purchases because the figure of closing stock relates to the opening stock figure of next year’s accounts. The Prudence Concept 1. a) Where there are alternative procedures b) Or alternative valuations c) The one selected should be the one which gives the most cautious presentation of the business’s financial position or results. 2. a) Revenues and profits are not anticipated but are related to the period in which they occur. E.g. when a sale is made. b) Provision is made for all known expenses or losses whether these are known for certain or just estimates. What definition means in layman’s terms is simply, if the company is in doubt about an expense or a liability that it may have, it should create a provision for it immediately, and if the company anticipates any future gains or profits, from a future sale for example, it should ignore it, unless realized. Examples: 1. Provisions for Bad & Doubtful Debts 2. Stock should be valued at the lower of net realizable value or cost Sales Revenue could be realized, if the following circumstances apply: 1. The transaction is for a specific quantity of goods at a known price. 2. The sales transaction is completed or it is known for certain that it will be completed. 3. Cash is received for a purchase, or it is virtually certain that cash will eventually be received. Consistency Concept states that similar items within a single s
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