Theory question 103
Accounting Concepts and ConventionsThe accountant of XYZ Limited prepares the financial statement following the rules and guidelines such as: business entity concept, going concern concept, realization concept; materiality concept and consistency concept. Explain each of the identified rules and guidelines followed by the accountant of XYZ Limited.
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- Business entity: the business is treated as separate from its owners; only business transactions are recorded (owner's private dealings are drawings/capital).
- Going concern: the business is assumed to continue operating for the foreseeable future, so assets are shown at cost less depreciation, not at break-up value.
- Realization: revenue is recognised when goods or services are delivered and the customer becomes liable to pay, not when cash is received.
- Materiality: only items significant enough to affect users' decisions need separate treatment; small items (e.g. a stapler) can be expensed.
- Consistency: the same accounting methods (e.g. depreciation, stock valuation) are used from year to year so results are comparable; any change must be disclosed.
One clear explanation for each of the five concepts.