Accounting Concepts (Edexcel IGCSE Accounting: Introduction to Bookkeeping & Accounting): Revision Note

Going concern

The assumption that a business will continue to operate into the foreseeable future by undertaking its current trading activities

Historic cost

Assets and liabilities are valued at the cost of the original transaction and kept as such on the financial statements

Duality

Each transaction is recorded using two accounting entries of opposite and equal values

Realisation

Business transactions are only recorded in the financial statements when a payment is made or the ownership has been transferred

Financial statements only record and report on business activities

• The records relate to the activities of one specific business

• These records and reports must not include any personal assets, expenses and liabilities of the owner

• Personal activities must be kept separate from the business

  • Assets invested into the business by the owner are recorded in the  equity account

  • Assets withdrawn from the business by the owner are recorded in the  drawings account

Financial statements only contain information about the transactions involving money

• Non-monetary information is not reported on the financial statements

• Information such as experience of the staff and employee satisfaction are not included in the statements

Transactions which have a low monetary value can be grouped rather than entered into separate accounts

• Small expense items such as window cleaning  may be grouped as sundry expenses

• Non-current assets which are low cost such as staplers and calculators are treated as expenses on the income statement and not recorded as capital expenditure

When a business chooses a method for a particular item, it should continue to use that method each year

• The method of depreciation used for a particular type of non-current asset should be used for that type each year

• The method for deciding on a provision for irrecoverable debts should be used each year

• The method can be changed if there is a good reason

  • But this decision and its impact needs to be recorded

Incomes and expenses must be matched to the year to which they relate or in which the benefit is gained

• Incomes and expenses must be adjusted on the income statement for accruals and prepayments to match the year in which the  benefit was gained

• Non-current assets are depreciated and the yearly depreciation is charged as an expense to match the cost to the year of its useful life

• A provision for irrecoverable debts is used to reduce the profit by an amount that is unlikely ever to be received

A business should not overstate its profit or its net assets

• A provision for irrecoverable debts is used to account for the debts that are unlikely to be paid

• Non-current assets are depreciated to give a realistic net book value

• Irrecoverable debts are written off if it is unlikely that the business will be able to retrieve the money