Accounting concepts conventions and solutions

Materiality Concept: In law there is a doctrine called de minimis non curat lex, which means that the court will not consider trivial matters. As indicated by the scenario it seems that the decision problem is a matter if the accounting systems annual conference that is previously scheduled to occur on Septembershould be canceled, due to the fact Hurricane Katrina has occurred and demolished building and homes leaving them in ruin in the city of New Orleans, Louisiana.

However, the concept does clearly allow for the amount of revenue recognized to be less than the selling price of the goods and services sold.

Accounting concepts and conventions

If business has acquired an asset, it must have resulted in one of the following: a Some other asset has been given up. Williamson, D. These concepts are so basic that most preparers of financial statements do not consciously think of them. By contrast, X might decide to withdraw Rs. Net realisable value is the selling price of the stock minus any costs involved in getting this stock into saleable condition e. A business may have intangible assets such as the flair of a good manager or the loyalty of its workforce. But some items disclosed in accounts are regarded as particularly sensitive and even a very small misstatement of such an item would be regarded as a material error.

In other words, the total of which the erroneous item forms part must be considered. Determining whether or not an item is material is a very subjective exercise. It is for the preparer of accounts to interpret what is and what is not material.

In these accounts, recognition is generally given to the accruals concept insofar as it relates to expenses.

accounting concepts with examples

There is no absolute measure of materiality. Second International Company is thinking of opening a plant in Germany. Solution to the clash between historical cost concept and Prudence convention Williamson states that prudence should prevail over the historical cost concept.

Examples include restaurants, beauty parlours and barber shops, and income tax preparation firms. The going-concern concept leads to the proposition that individual financial statements are part of a continuous, inter-related series of statements.

Since most of these establishments do not extend credit to their customers, cash-basis profit may not differ dramatically from accrual-basis income. This is because a pure cash-basis approach would require treating the acquisition of inventories as a reduction in profit when the acquisition costs are paid rather than when the inventories are sold.

Accounting concepts definition

Required: A ten-column worksheet for the year ended 31 March Acid test ratio is 1. Earnings per share are sh. Similarly, the assets and liabilities devoted to business activities are entity assets and liabilities. Without principles and standards, financial reporting would not fairly present the financial position of a company. In other words, there may be a direct clash between the accruals and conservatism principles. Rates of Sh. Objectivity means that accountants must be free from bias. There is no absolute measure of materiality. Required: Describe the errors and misappropriations that may occur if the following are not properly controlled: i Receipts paid into bank accounts; ii Payments made out of bank accounts; iii Interest and charges debited and credited to bank accounts. Since an accounting entity is an artificial creation, it is essential to know to whom its resources belong to or what purpose they serve.
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