Accounting Concepts and Conventions
Introduction
Accounting concepts and conventions as used in accountancy are the rules and
guidelines by that the accountant lives. All formal accounting statements should
be created, and presented according to the concepts and conventions that follow.
In the United Kingdom, four of the following accounting concepts are laid down in
Statement of Standard Accounting Practice number 2 (SSAP 2: Disclosure of
Accounting Policies), they are:
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Going concern concept
Accruals or matching concept
Consistency concept
Prudence concept
Going concern concept
It is assumed that the business under consideration will remain in existence for
the foreseeable future.
Without this concept, accounts would have to be drawn up on the 'winding up'
basis. That is, on what the business is likely to be worth if it is sold piecemeal at
the date of the accounts.
Accruals (Matching) concept.
The purpose of this concept is to make sure that all revenues and costs are
recorded in the appropriate statement at the appropriate time.
Costs concerning a future period must be carried forward as a prepayment for
that period and not charged in the current profit statement. For example,
payments made in advance such as the prepayment of rent would not be treated
as an expense in the current accounting period.
Consistency concept
This concept states that accounting policies and treatments should be applied
consistently from one period to the next.
Any variation in accounting policy or treatment may be permitted if the new policy
or accounting treatment provides a fairer view of the business’s activities.
Prudence concept
Basically the concept says that whenever there are alternative procedures or
values, the accountant will choose the one that results in a lower profit, a lower
asset value and a higher liability value. The concept is summarised by the well
known phrase 'anticipate no profit and provide for all possible losses'.
Monetary measurement concept
It simply and clearly states that only those transactions that are true financial
transactions may be accounted for. That is, only those transactions that may be
expressed in money values (whatever the currency) are of interest to the
accountant.
Materiality concept
We are concerned here with the idea that accountants should concern
themselves only with matters that are significant because of their size and should
not consider trivial matters. The problem, of course, is in deciding what is and
what is not material: we are concerned here with RELATIVE IMPORTANCE.
Realisation concept
The realisation concept helps the accountant to determine the point at that he
feels that a transaction is certain enough for the profit to be made on it to be
calculated and taken to the profit and loss account. Realisation occurs when a
sale is made to a customer. The basic rule is that revenue is created at the
moment a sale is made, and not when the account is later settled by cheque or
by cash.
Historical cost concept
It basically means that accounting transactions are recorded and accounts are
prepared using historical cost figures. That is the value at the date of transaction
without adjusting for changing in prices or general inflation.