Year 11 Accounting
Accounting Concepts
Reference
Page 17 of the booklet
What are Accounting Concepts?
Accounting Concepts are the accounting
‘theory’ used in preparing accounting
information, such as Balance Sheet, Income
Statement.
What are the accounting concepts
we will learn this year?
Accounting Entity Monetary Concept Historical
Cost
ACCOUNTING CONCEPTS
Going
Concern
Period
Reporting
Accrual Basis
Accounting Entity Concept
Thinking Time!!!!!!
Will you include your house
(which is an asset) in your
business’s Balance Sheet
as an asset?
Why??????
Accounting Entity Concept Definition
Accounting Entity Concept states that:
The financial (money) affairs of the
OWNER should be
SEPARATE
from the financial (money) affairs of
the BUSINESS.
Why Accounting Entity is Important?
Accounting Entity Concept ensures that:
All the information contained in the
financial statements SOLELY reflect
entity’s transactions ONLY.
NOT BOTH OWNER AND ENTITY’S
TRANSACTIONS.
Review Question
So will you still include your house in your
business’s Balance Sheet as Buildings?
NO! NO! NO! because
The ACCOUNTING ENTITY Concept
states that the financial affairs of the
OWNER (i.e. Owner’s house ) should
be separated from the financial affairs
of the BUSINESS (i.e. Buildings )
Monetary Concept
Thinking Time!!!!!!!!
Can you tell me which one ‘worth’ the
most, and Why?
THE PIG
THE GOAT
OR
Monetary Concept - Definition
The Monetary Concept states that:
All transactions in financial
statements must be measured in
DOLLAR
In New Zealand, the common
measurement unit will be
NEW ZEALAND DOLLAR
Monetary Concept
Can you tell me which one ‘worth’ the most,
and Why?
THE PIG
NZ$400.00
THE GOAT
NZ$0.05
Why Monetary Concept is important?
Monetary Concept helps us to compare the
value of different items easily because we
use DOLLAR to measure the items.
Monetary Concept Q & A Time
Q:
A:
If you are the owner of a shop, will you
include yourself in the Balance Sheet
as an asset?
No, the Monetary Concept states that all
transactions in financial statements are
measured in dollars. As owner cannot
be measured in dollars, therefore
owner cannot be shown on Balance
Sheet.
Monetary Concept Q & A
Q:
Your business bought a computer from
Australia cost A$1,000. Do you show
the amount of computer as A$1,000 or
NZ$1,099 in the Balance Sheet? Why?
A:
NZ$1,099 because according to the
monetary concept, the common unit of
measurement in New Zealand is New
Zealand Dollars.
HISTORICAL COST
Historical Cost is a measurement method
that measures assets and liabilities.
Historical Cost states that:
Assets are reported at the amount when it was
purchased.
Liabilities are reported at the amount
When it occurred.
HISTORICAL COST Question
Yummy Noodles purchased a machine 10
years ago at $10,000. After 10 years, same
sort of machine is now worth $30,000.
Under Historical Cost Concept, which
machine value you will choose to report on
Balance Sheet?
HISTORICAL COST Question
Yummy Noodles purchased a machine 10 years
ago at $10,000. After 10 years, same sort of
machine is now worth $30,000.
What does Historical
Cost say?
10 years ago?
Current price?
HISTORICAL COST ANSWER
According to Historical Cost Concept,
Yummy Noodles will report the amount of
machinery at $10,000 (that was purchased
10 years ago) because the concept states
that assets should be reported at the dollar
amount when it was purchased (i.e. 10
years ago)
HISTORICAL COST
Another example
Doctor Surgery
Balance Sheet as at 31 March 2006
PROPERTY, PLANT AND EQUIPMENT
Medical Equipment (cost)
$10,000
This represents the
HISTORICAL COST
GOING CONCERN
When accountants prepare financial
statements, like Balance Sheet, they always
assume the entity (such as business or club)
is GOING CONCERN.
Going Concern is:
An entity will continue its operation
in the FORSEEABLE future.
Why Going Concern is important?
If the entity is NOT in GOING CONCERN.
Q:
What do we mean by ‘NOT in GOING
CONCERN’?
A:
The entity (such as club/business) will
NOT continue its operation in the
foreseeable future
NOT GOING CONCERN?
If an entity is not going concern,
its accountant will use other ways
to measure the amount of assets
and liabilities.
Going Concern Question
If a business which uses historical cost
measurement, is going to shut down next
month. Will the accountant keep using
historical cost method?
Going Concern Answer
As the business is going to shut down next
month, that means the business is NOT
going concern.
The accountant needs to use OTHER
measurement method to measure the
assets and liabilities.
PERIOD REPORTING
Thinking Time!!!!!
DO YOU CHECK YOUR SCHOOL
PERFORMANCE YEARLY OR AT THE
END OF YOUR UNIVERSITY SCHOOL
LIFE?
PERIOD REPORTING
Period Reporting Concept states:
The [foreseeable] life of an entity is
divided into nominated EQUAL period of
time [usually a year].
2006
2007
Going Concern/Life of the entity
2008
PERIOD REPORTING
Why do accountants prepare their financial
statements using PERIOD REPORTING
concept?
[Hint: Why does school want to have tests
every term?]
PERIOD REPORTING
The reason that accountants prepare the
financial statements using period reporting
concept is:
Users of accounting can measure
and compare financial performance
and financial position from period to
period so users can make better
economic decisions.
PERIOD REPORTING
Q:
Following shows the heading of Income
Statement for Small Business
Small Business
Income Statement for the year ended
31 March 2006
Explain how does Period Reporting applies
Answer
This is where when Period Reporting
concept applies :
Small Business
Income Statement for the year ended
31 March 2006
The concept applies because the statement
is prepared based on equivalent period of
time (i.e. yearly).
Another Question
Auckland Sailing Club prepares its financial
statements at the end of every June and
December.
Q:
Does it mean Period Reporting
concept not apply? Explain.
Answer
The Period Reporting concept applies because:
The concept states that the life of the entity is
divided into nominated equal period of time.
As Auckland Sailing Club prepares financial
statements every 6 months (June and
December), the concept applies.
ACCRUAL BASIS
Thinking Time:
Write YES or NO for the following questions.
If you are the owner of a dairy shop. Assume the
year ended on 31 December 2005. Will you
include the following in 2005 financial statements.
The sale of milk to Mr Moo on credit on 1
January 2006.
2. The purchase of fridge on 31 December 2005.
3. The staff wages (from 7 December – 28
December 2005) but not yet paid.
1.
ACCRUAL BASIS - DEFINITION
Transactions (like purchasing stock, sale of
good etc) are recognised when they occur
(and not as cash is received or paid)
AND
Recorded in the accounting records
AND
Reported in the financial statements of
the periods which they relate.
Why Accrual Basis is important?
It is important so the financial statements
reflect all transactions belong to a particular
period only. Not a combination of different
periods (such as including 2005 and 2007
financial transactions)
ACCRUAL BASIS
Paid wages by cash on
15 Dec 2006
Paid electricity by cash
on 10 February 2007
Purchased stock on
credit on 4 April 2006
Repay loan on 15 May
2007
2006
2007
2008
Sold goods on credit to
customer on 2 Dec 2006
but received on 4 Jan 2007
Received cash from
accounts receivable on
4 April 2007
Cash Sales on 8
November 2006
Credit Sales on 3 June
2007
ACCRUAL BASIS REMINDER
Transaction (a cash or credit transaction) is
only recognised when it occurred, and
recorded in the accounting records and
reported in the financial statements of a
period which the transaction belongs to.
For example, when there is a credit sale transaction in
2005, even though there is no cash receipt, the
transaction still be recognised as part of 2005
transactions, and should be recorded in 2005 accounting
records and reported in 2005 Income Statement as
Income.
Accrual Basis – Solution
The sale of milk to Mr Moo on credit on 1 January 2006 will NOT
include in the 2005 financial statement because the ACCRUAL BASIS
concept states that:
Transaction hasn’t occurred in 2005 (sale
of milk happened on 1 January 2006) so it
CANNOT be recognised as a 2005
transaction AND
CANNOT be recorded in 2005 accounting
records AND
CANNOT be reported in 2005 financial
statements.
ACCRUAL BASIS Q & A
The purchase of fridge on 31 December 2005 should be
included in 2005 Balance Sheet because ACCRUAL BASIS
concept states that:
Transaction should be recognised when it
occurred (The fridge was purchased on 31/12/2005)
and
should be recorded in the accounting records (the
fridge would be recorded in 2005 accounting records)
and
should be reported in the financial statements of
the period to which it relates (the fridge would be
reported in 2005 Balance Sheet)
ACCRUAL BASIS Q & A
The staff wages (from 7 December – 28 December
2005) but not yet paid should be included in 2005
Income Statement because
Transaction should be recognised when it
occurred (the transaction has occurred in 2005 as
workers worked from 7 Dec – 28 Dec) and
should be recorded in the accounting records (the
wages would be recorded in 2005 accounting records)
and
should be reported in the financial statements of
the period to which it relates (the wages should be
reported in 2005 Income Statement)
TASK

Try to complete the task on page 18 of
your Achievement Standard 1.1 booklet.