ACCOUNTING CONCEPTS and PRINCIPLES

1. ACCOUNTING CONCEPTSandPRINCIPLES • 會計概念及原則

2. Accounting concepts(會計概念) • Recording has been based on certain assumptions.(假設) • e.g. • Can we made depreciation using straight line method for 2001, but using reducing balance method for 2002, using revaluation method for 2003……???

3. One set of final accounts for all purposes • Copies of the same set of final accounts are given to all the different people.

4. True and fair concept • A firm should disclose all significant information in the financial statements to the concerned parties so that the users may have a true and fair view of the state of affairs of the firm.

5. The need for objectivity(客觀性) • Financial accounting ensures objectivity by using generally agreed methods in preparing financial statements. This helps to provide objective, uniform and useful accounting information for different user. • (為不同需求的人, 提供客觀及統一的會計資料)

6. Accounting Concepts • Money measurement concept (貨幣穩定假設) • The going concern concept (繼續經營概念) • The business entity concept (商業個體概念) • The realisation concept (變現概念) • Accrual /Matching concept(應計概念) • Materiality Concept(重點鉅數概念) • Prudence/Conservaitsm Concept(審慎性原則) • Consistency Concept (一致性概念) • Historical Cost Concept (歷史性成本概念)

7. Money measurement concept(貨幣穩定假設) • It can be measured in money • Most people will agree to the money value of the transaction. • Assumes that the value or purchasing power of money is constant, ignoring the effects of inflation or deflation.(通賬/通縮)

8. Money measurement concept(貨幣穩定假設) • e.g. • Accounting doesn’t tell how good the quality of employees’ skills are although this is important for the success of a business.

9. The Going concern concept (繼續經營概念) • This concept implies that the business will continue to operate for the foreseeable future. • This is why we use the historical cost concept and ignore the current market value in asset valuation.

10. The Going concern concept (繼續經營概念) • e.g. • Fixed assets are shown at cost less accumulated depreciation.

11. The Business entity concept(商業個體概念) • This concept implies that the affairs of a business are to be treated as being quite separate from the non-business activities of its owners. • Personal transactions of the owner should not be included.

12. The Business entity concept(商業個體概念) • e.g. • A director’s private car should not be included in the fixed assets of the company.

13. The Realisation concept(變現概念) • This concept holds to the view that profit can only be taken into account when realisation has occurred. • Generally, sales revenue arising from the sale of goods is recognised when the goods are delivered to the customers.

14. The Realisation concept(變現概念) • e.g. • Profit is earned when goods or services are provided to customers. Thus it is incorrect to record profit when order is received, or when the customer pays for the goods.

15. Accrual concept(應計概念) • The accrual concept says that net profit is the difference between revenues and expenses. • Determining the expenses used up to obtain the revenues is referred to as matching expenses against reveues. • Income and costs are recognised as they are earned and incurred but not as they are received or paid.

16. Accrual concept(應計概念) • e.g. • Expenses have to take into account of amounts payable at the end of an accounting year even though the cash has not yet been paid.

17. Materiality Concept(重點鉅數概念) • Financial statement should separately disclose significant items for they would influence decisions of users. • Accounting does not serve a useful purpose if the effort of recording a transaction in a certain way is not worthwhile. • In other words do not waste your time in the elaborate recording of trivial items.

18. Materiality Concept(重點鉅數概念) • e.g. • A stock of stationery worths $10 should be treated as an expense when it was bought.

19. Prudence/Conservaitsm(審慎性原則) • The accountant should always be on the side of safety. • The prudence concept means that normally he will take the figure which will understate rather than overstate the profit. • Provision is made for all known liabilities.

20. Prudence/Conservaitsm(審慎性原則) • E.g. • Provision for doubtful debts should be deducted from debtors in balance sheet.

21. Consistency(一致性概念) • When a firm has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way. • Frequent changes in the accounting methods would lead to misleading profits calculated from the accounting records. • It states that when a firm has chosen a method for the accounting treatment of an item, all similar items should be treated in the same way.

22. Consistency(一致性概念) • E.g. • Depreciation method of certain fixed assets once adopted should be used in the following years.

23. Historical Cost concept(歷史性成本概念) • Assets are normally shown at their original costs of acquisition. • Any changes in the market value after the purchase are ignored. • Historical cost is the most objective measure of the value of an asset. However, it cannot reflect the current value of an asset.

24. Historical Cost concept(歷史性成本概念) • E.g. • A fixed asset acquired at a cost of $100,000 would be recorded at this amount in the books. Even if its market value may have gone up or down in future, it should be recorded at its original cost $100,000.

25. Exercises