ACCOUNTING CONCEPTS

Concepts

100

A hotel has traditionally depreciated its fixed assets using the straight-line method.  However this year it is contemplating a change to the reducing balance method.

Consistency

200

• A case of food poisoning occurred in a restaurant. The owner is being sued by a number of clients who were affected. The amount that the restaurant is likely to suffer from this lawsuit in coming months is unascertained at present,  so it is shown as a post statement of financial position note.

Full disclosure

300

• The company has two motor vehicles which were acquired on hire purchase. Although these have not been fully paid for as yet, they are still shown in the statement of financial position as leasehold assets.

Substance over form

400

• There are several minor expenses classified under ‘miscellaneous expenses’.

Materiality

500

•  Prior to the preparation of the statement of profit or loss, the firm took into  account  the  significant reduction in the value of the fixed assets that were used during  the year.

Prudence or conservatism

Principles

100

• The production manager thinks that it is a waste of time to be preparing financial statements every year, since most production contracts are on a long-term basis.

Periodicity / Time interval

200

• Several clients have either enquired about our service or has promised to place substantial orders, but we have not yet contracted any business.

Realisation or revenue recognition

300

• The  managing director wished that  the excellent working conditions and  worker relations that they have worked so hard to maintain should be reflected  in  the accounting statements.

Money measurement

400

There is some uncertainty about  the  future of the company, and some shareholders are contemplating  the  sale of their shares as quickly as possible.

Going concern

500

• In order to reflect a net profit as required by the specific industry, the firm is planning to transfer some of its items of expenditure to the books of another business enterprise which is a wholly owned subsidiary.

Business entity

Assumptions

100

• Most of the assets were bought a long time ago, and would worth much more that the books show today.

Historical cost

200

• During the year, an entity was contracted as advertising agent for the local newspaper.  The commission revenue earned was 5% of the $3 million transacted. However at year end, only one half of this income was received. The manager is contemplating how much he should include in the financial statements.

Accrual or matching

300

• In recording a transaction for cash donated to charity, one entry was made to the accounts. There were no other entry was made for this transaction.

Duality

400

• Two boxes of paper were in stores at the end of the year of a very large marketing firm. They were omitted from the financial statements. As the accounting manager you are now wondering what you should do with the financial statements. Should you restate them or let them remain?

Materiality

500

Ensure that all relevant financial information is reported.

Full disclosure