Explain How the Fundamental Accoungting Concepts Are Used in Preparing Financial Statement

Topics: Balance sheet, Generally Accepted Accounting Principles, Income statement Pages: 6 (1549 words) Published: May 10, 2011

Business Accouting
Mr S. Palan

ASSIGNMENT1.Explain how the fundamental accoungting concepts are used in preparing financial statement. Use examples to illustrate the application of the fundamental accounting concepts.
Accouting is the language of business and it is used to communicate finance information. In order for that information make sencse, accouting is based on 10 fundamental concepts. These fundamental concepts then form the basic for all of the Generally Accepted Accouting Principles (GAAP). And these are 10 fundamental concepts:the Business Entity Concept, Monetary Concept, Historical (Cost) Concept, Going Concern Concept, Dual Aspect Concept, Accrual Concept, The relisation Concept, Consevatism, Consistency, Materially

In those fundamental accounting concepts above which I would apply and explain for 6 fundamantal accouting concept below which I think they are used in preparing the Financial Statements: 1.Going concern:

-According to Dyson (2006) The going concern concept implies that the business will continue to operate for the fore-seeable future. It means that it is considered sensible to keep to the use of the historical cost concept when arriving at the valuation of assets. And if the business decides to liquidate or become bankrupt then a different approach to valuation is required. -This value includes the liquidation value of a company's tangible assets as well as the present value of its intangible assets (such as goodwill). The going-concern value is worked into the purchase price of a company, and is the main reason why the purchase price of a company tends to be higher than the current value of the assets of the company. For example, the liquidation value of Widget Corp. is $10 million. This sum represents the current value of inventory, buildings and other tangible assets that can be sold assuming that the company is completely liquidated. However, Widget Corp.'s going-concern value could very well be $60 million, as the company's reputation of being the world's leading widget producer and its ownership of patents and associated rights for widget production mean that the company should have a large steady stream of future cash flows. 2.Accrual concept

-When preparing the profit and loss account, revenue and profits, and matched with the associated costs and expenses incurred in earning them. This means that revenues and expenses are recognized when they are incurred rather than when the related cash is received or paid. Accrual of income is always measured over a period of time which is normally the accounting year. Expenses are costs incurred in earning revenue. Those expenditures which may be charged against revenues for a period will be considered as operating expenses. The accrual concept is applied both in ascertaining the revenues for a period and ascertaining the expenses to be charged against the revenues.

For example if  a business has a year end of 30th June 19x3 and there had been an electricity charge of £60 for the six months to the end of December 19x2 , £30 for the quarter ending 31 March 19x3 , and an estimate of £20 has been made  for the quarter ending 30 June 19x3 . The amount charged in the profit and loss account for the year end 30/06/x3,  will be the charge for the 12 months £110, i.e. £60 + £30 + £20. This estimate of £20 for the March/June quarter is known as an accrual. 3.Monetary Concept:

-Accounting uses money to express certain facts of a business and they can show a expression of the wealth of the business. 4.Consistency concept:
- There should be consistency of treatment of like items within each accounting period and from one period to next. In other words, once you have chosen an accounting treatment, you should stick with it from one year to next.. It helps the user to make comparisons over time, and so to pick out useful...
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