Accounting Concepts and Principles

• Accounting information should be relevant for many users.
• Three main reports prepared include the statement of profit or loss, statement of financial position, and statement of cash flow.
• Limitations arise when using generally accepted accounting concepts and principles.

Accounting Concepts & Principles

• Accounting Period Concept divides the life of a business into time periods, recording transactions by date.
• Accounting Entity Concept requires the owner and the business to be regarded as separate entities and all transactions are from the business's perspective.
• The concept can include corporations, sole proprietorships, partnerships, clubs, trusts, and individual taxpayers.
• Monetary Principle dictates that all transactions are recorded in local dollars and cents.
• Going concern principle assumes that the business will continue its operation indefinitely and is not likely to be liquidated in the future.
• Historical Cost Principle states that all assets are initially recorded at the amount of cash or cash equivalents paid at the time of acquisition.

Qualitative Characteristics - Relevance

• Relevance is financial information that helps a business confirm existing data or predict future data.
• Materiality, the importance of an item to an entity, affects its relevance.
• Different entities may have different standards for judging materiality based on their specific conditions.
• Some information is rounded to the nearest thousand or million due to different company sizes, which allows some organizations to ignore small issues that might be important to smaller companies.

Qualitative Characteristics - Other

• Faithful information represents information in a useful way using numerical and non-numerical terms, being relevant and unbiased with little to no error.
• Timeliness requires information to be available to decision-makers in time to influence decisions, which may compromise accuracy.
• Comparability compares aspects of an entity over time, with consistent measuring which achieves a business standard, however other methods or policies may sacrifice comparability.
• Verifiability confirms economic events, with independent observers reaching a consensus for a faithful representation of figures.
• Understandability requires presented information to be easily understood without sacrificing relevance or faithful representation.
• Reports should be prepared with the users' interests in mind, avoiding oversimplification due to the complex nature of accounting.

Accounting Period and Historical Cost

• Definition: The accounting period concept requires predictions and estimations in financial reports for entries, such as doubtful debts, depreciation, and inventory valuations.
• Limitations: The accounting period concept conflicts with the characteristics of faithful representation and comparability.
• Accuracy can be an issue with including predictions.
• Historical Cost is that assets are recorded in terms of their historical cost, which can differ from the true value of the assets.
• It ignores changes in money values during times of price changes. It is limited because the assets' original cost must be recorded, though the value might change later.

Statement of Profit or Loss - Inventory

• Accuracy depends on stockkeeping and record keeping.
• Control is improved with a perpetual accounting system.
• Inventory is valued at either the 'cost' or 'net realisable value', whichever is lower, leading to lower inventory and profit figures.
• The difference between the 'cost' and 'net realisable value' can lead to errors when valuations are calculated.

Statement of Profit or Loss - Depreciation & Doubtful Debts

• Depreciation shows a reduction in an asset's value over time due to wear and tear, and the depreciation must be subtracted from the original or residual value at the end of each financial year.
• The estimations used for calculations, like Estimated Useful Life and Estimated Residual Value, can lead to figures that are determined and are not solid numbers.
• Doubtful Debts are potentially unrecoverable debts with a provision account and the affect profit figures and is a contra asset for accounts receivable.
• The contra asset is limited because it estimates how much money might be lost is not a reliable number.

Statement of Profit or Loss – Price Changes & Manipulation

• Price Changes are defined in terms of the difference in the purchasing power of money over time and how the profit or loss statement is affected.
• Inflation causes an example where an asset purchased 10 years ago would not reflect the dollar value of the current year.
• Inconsistencies with depreciation cause problems when comparing regular costs with outdated expenses, creating inaccuracy when calculating revenue.
• The ability to manipulate values for Revenue and Expenses may result in short-term gain for employees or the business.
• For example, a business can choose which method to apply for an asset's depreciation, which would cause depreciation to vary for the financial year.

Statement of Financial Position - Accounts Receivable, Inventories & Stock

• Account receivable is influenced by the estimation for provisions and accounting methods that influence how the usefulness as an indicator of what is going to actually be received from accounts receivable.
• The limitations of Accounts Receivable are bad and doubtful debts, including inaccurate or incomplete invoicing.
• The application of the 'lower of cost and net realisable value' rule influences inventory figures.
• Cost is generally lower than net realisable value (NRV).
• The actual figure for inventories is often lower then the NRV of the stock on hand.
• Differences in calculating processes exist with different methods of valuing inventories with estimation, the usefulness of any calculation of inventory figures may be limited.
• In the Statement of Financial Position small items, like stamps, stationery, oil, and fuel, shouldn't be included due to materiality.
• Due to expenses, small items should instead be written off.
• Calculating minor expenses can limit the accuracy and usefulness of reports.

Statement of Financial Position - Property, Plant & Equipment

• The value of depreciation still has limited use if it is accurate, which doesn't represent service outlook.
• Assets can be fully depreciated in the books while still earning profit.
• A strict application of historic cost principle mean Increases of Assets in the value of Assets are seldom shown.
• There is no requirement for non-current assets to get revaluated in any organisation.

Statement of Financial Position – Intangible Assets

• Intangible assets are invisible assets, like a patent or copyright.
• Intangible assets are expressed as certain legal rights or technologies.
• The recorded value tends to be the true value.
• Intangible assets are not of a definite cost like Goodwill, patents and copyrights, Brands and Trademarks.
• Statements aren't always accurate because it requires that the value is always agreed on between the entities involved.

Statement of Financial Position – Liabilities & Owner's Equity

• Liabilities are only limited by estimation or balance day adjustments.
• There is more concern over assets due to the treatment of leaseholds and contingent liabilities.
• Retained earnings and reserves are sometimes inaccurate.
• Undervalued inventories and excessive allowances made for depreciation and doubtful debts can inflate capital.
• An owner's equity may not reflect true net worth.

Statement of Financial Position – Price Changes

• Limitations exist when price changes are used in the Statement of Financial Position, the value of a whole ground of assets might be equal to the sum of the values of the individual assets.
• There process of adding items can be implicated with differing purchasing powers.
• Assets that are added together include non-current ones and account receivables.
• Replacing historical costs with current costs would implicate the concept of accounting altogether.

Accounting information should be relevant for many users. The main reports prepared include the statement of profit or loss, financial position statement, and cash flow statement. Limitations arise when using generally accepted accounting concepts.