ST. ANDREW HIGH SCHOOL FOR GRILS
PRINCIPLES OF ACCOUNTS
SECTION 2: ACCOUNTING AS A SYSTEM (Part 1)
Accounting Concepts
The term Accounting Concepts refers to the rules and principles of accounting that should be followed in
preparing all accounts. The main objective is to maintain uniformity and consistency in accounting records.
⮚ Business Entity principle/Separate Entity – this states that the business is separated from the persons
who own it and as such personal and business financial data separated. It is the very basis of accounting
concepts, conventions, and principles.
⮚ Dual Concept -This concept is the basis of recording business transactions in the books of accounts. It is
reflected in the using of the double-entry system. This concept assumes that every transaction has a dual
effect, so it affects two accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. The duality concept is commonly expressed in terms of fundamental accounting
equation which is Assets = Liabilities + Capital.
⮚ Continuing-concern concept/Going concern– The business will continue to operate. Therefore,
transactions are recorded assuming that the business will exist for a long period of time. This is an
important assumption of accounting, as it provides a basis for showing the value of assets in the balance
sheet; For example, a company purchases a plant and machinery of $620 000 and its life span is 10
years. Fixed assets are shown in the books at their cost price and not market price.
⮚ Time-period concept – This divides the business into equal periods of time such as month, quarter and
year.
⮚ Historical Cost principle/Cost principle – Assets should be shown on the balance sheet at the cost of
purchase instead of current value. Therefore, the cost of the fixed assets is recorded at the date of
acquisition cost. The acquisition cost includes all expenses in getting the fixed assets such as installation
cost, freight cost, insurance etc. There must be supporting documents. If the business entity does not
pay anything for an asset, this item will not be shown in the books of accounts.
⮚ Consistency Principle – Methods and procedures must be kept the same over a time. This principle
allows for better comparison of data collected in the business.
⮚ Prudence –an entity must not overestimate its revenues, assets and profits; besides this it must not
underestimate its liabilities, losses and expenses.
⮚ Money-Measurement – For an accounting record to be made it must be able to be expressed in monetary
terms. The transactions which cannot be expressed in monetary terms are not recorded in the books of
accounts. For example, loyalty and honesty of employees are not recorded in books of accounts because
these cannot be measured in terms of money although they do affect the profits and losses of the
business.
⮚ Realization Concept - This concept states that revenue from any business transaction is only recognized
when goods or services have been delivered. Therefore, revenue can only be recognized after it has
been earned.
⮚ Accrual concept states that revenues are recorded when they are earned and when cash is received.
Expenses are also recorded when they are incurred and not when they are paid.
⮚ Matching Principle - The matching concept requires that you match revenues with expenses incurred to
earn those revenues, and you report both at the same time. For example, if you own a store and spent
money to buy stock, you would not record that expense until you sold the goods for revenue.
Types of business organizations
⮚ Sole Trader – this is owned by one person. The owner/proprietor gets all the profits and is responsible
for all the losses.
⮚ Partnership - Owned by partners of 2-20 persons. An agreed amount is contributed by each member.
Profits/losses are shared according to partnership agreement or by law.
⮚ Limited Company - Limited liability companies are companies owned by shareholders who each
contribute to the funds needed to establish and run the company. Most shareholders do not take part in
the day-to-day management and control of the company, but elect directors to undertake these
responsibilities on their behalf. Shareholders are rewarded by receiving some of the profits made by the
company if it is successful. Shareholders’ responsibility for the debts of the company is limited to the
amount they invest. Unlike sole traders and partners, shareholders are not at risk of losing their private
funds if things go wrong.
There are two types of limited liability companies.
1.
2.
Private Limited Liability Company
Public Limited Liability Company
The Private Limited Company only allows friends, relatives and coworkers to purchase shares and to be a part
of the company. Its privacy is also protected by the fact that unlike the public limited liability company, it does
not have to publish its balance sheet in the newspapers. Private limited companies are indentified by ‘Co. Ltd’
The Public Limited Company allows members of the public to purchase shares. The shares/stocks of public
limited companies are traded on the stock market. Public limited companies are indentified by ‘Plc’
Legally the private limited company can only have a minimum of two and a maximum of fifty persons to join.
Whereas the public limited liability company has a minimum of seven members and there is no limit to the
number of shareholders that can join.
⮚ Cooperatives – These are owned by members who receive dividends. These members purchase shares at
fixed price which is usually extremely low per share. The main aim of this organization to provide
services to its members.
⮚ Non-Profit Organizations – A form of business owned by a group of people called members. The
common interest or aim of the members is to fulfill the needs of members rather than making a profit.
Financial Statements
These Statements are produced at the end of an accounting period. Organizations prepare financial statements
such as: Income Statement/Trading and Profit and Loss Account, Income and Expenditure Account, Balance
Sheet/Statement of Financial Position and Cash Flow.
The income statement/trading and profit and loss account is the main financial statement that shows the profits
or losses for sole traders, partnerships and limited companies.
In the case of co-operatives and non-profit organizations, information about surpluses or deficits (these words
are used instead of profit and loss) is provided by an income and expenditure account.
The statement of financial position/balance sheet provides information about the assets, liabilities and capital of
a business. It is prepared by all the organizations listed above. In addition, limited companies are required to
produce cash flow statements, which detail for the previous year the main sources of a company’s cash and how
that cash was used.
The role and impact of technology on the accounting process
Accounting processes which could be readily performed by the use of the computer, include: payroll, inventory
control, receivables and payables schedules, point-of-sale, financial analysis and report.
Software currently being used in Accounting
⮚ Sage software such as ACCPAC, Peachtree
⮚ Account Edge
⮚ QuickBooks
⮚ Dac Easy
⮚ Microsoft Dynamics
⮚ Netsuite Small Business
⮚ Vision Point
⮚ Cougar Mountain
⮚ QuickBooks Pro
⮚ Accpac from Sage
⮚ Xero
⮚ Syspro 6.1
⮚ Peachtree Complete Accounting
⮚ Wave
⮚ MYOB
⮚ TurboCASH
Advantages of using computers in accounting
⮚ Faster and efficient in processing of information.
⮚ Accuracy
⮚ Automatic generation of accounting documents like invoices, cheques and statement of account.
⮚ More timely information can be produced.
⮚ Many types of useful reports can be generated for management to make decisions.
⮚ Staff motivation
⮚ Easy back up and restoration of records
Disadvantages of using computers in accounting
⮚ Power failure
⮚ Computer viruses
⮚ Hackers
⮚ Some accounting system may not be properly set up to meet the requirement of the business due to
badly programmed or inappropriate software or hardware or personnel problems can caused more
havoc.
⮚ Maintenance cost
⮚ Training cost