key accounting principles
There are many accounting concepts which underpin GAAP such as the accruals and going concern concepts in particular.
Going concern-it is assumed that the organisation will continue to operate indefinitely. This just means that when we draw up financial summaries, we do not assume the organisation is in severe financial difficulties.
Accruals concept-when calculating the profit or loss of an organisation, all income and related expenditure for a specified period should be included, not simply money paid or received.
This means that, for example, if a summary of income and expenditure for a year is drawn up under financial accounting principles, all relevant revenues and costs must be included, not just the money paid and received. Consider a company which always summarises its finances according to calendar years. If, by end of 2004, electricity bills had been received for the period up to 31 October only, the summary must include an estimate of electricity used in November and December. Conversely, if in January 2004 rent had been paid in advance for the 18 months to 30 June 2005, the summary would include only the rent for the 12 months to 31 December 2005.
Consistency concept accounting procedures used should be the same as those applied previously for similar items. This allows comparability of financial summaries over time. Accountants must not be consistently wrong, so they are allowed to change procedures if there are good reasons to do so, provided an explanation of the change given.
Prudence concept Accountants should be cautious in the valuation of assets or the measurement of profit. The lowest reasonable estimate of an asset’s value should be taken, whilst a forecast loss would be included but not a forecast profit. This is also known as the ‘conservatism’ concept. This concept is of great importance to users of the accounting information, as it ensures that the accounting summaries have not been drawn up on the basis of over-optimistic or
Going concern-it is assumed that the organisation will continue to operate indefinitely. This just means that when we draw up financial summaries, we do not assume the organisation is in severe financial difficulties.
Accruals concept-when calculating the profit or loss of an organisation, all income and related expenditure for a specified period should be included, not simply money paid or received.
This means that, for example, if a summary of income and expenditure for a year is drawn up under financial accounting principles, all relevant revenues and costs must be included, not just the money paid and received. Consider a company which always summarises its finances according to calendar years. If, by end of 2004, electricity bills had been received for the period up to 31 October only, the summary must include an estimate of electricity used in November and December. Conversely, if in January 2004 rent had been paid in advance for the 18 months to 30 June 2005, the summary would include only the rent for the 12 months to 31 December 2005.
Consistency concept accounting procedures used should be the same as those applied previously for similar items. This allows comparability of financial summaries over time. Accountants must not be consistently wrong, so they are allowed to change procedures if there are good reasons to do so, provided an explanation of the change given.
Prudence concept Accountants should be cautious in the valuation of assets or the measurement of profit. The lowest reasonable estimate of an asset’s value should be taken, whilst a forecast loss would be included but not a forecast profit. This is also known as the ‘conservatism’ concept. This concept is of great importance to users of the accounting information, as it ensures that the accounting summaries have not been drawn up on the basis of over-optimistic or