Off piste Intro & concepts.pptx

Mr Chris’s not on the curriculum Introduction AKA The PHILOSOPHIES of Accounting. (not just numbers innit alrite?) Learning aims Today you will be able to: – Describe key concepts for accounting – Illustrate principles of relevance, reliability, comparability & understandability Specification Review...

Mr Chris’s not on the curriculum Introduction AKA The PHILOSOPHIES of Accounting. (not just numbers innit alrite?) Learning aims Today you will be able to: – Describe key concepts for accounting – Illustrate principles of relevance, reliability, comparability & understandability Specification Review Accounting Concepts Accounting Concepts are broad assumptions which underlie the preparation of all accounting records. – Accounting Entity (or Business Entity) – Monetary Concept (Money Measurement) – Duality – Going Concern – Accounting period concept – Accruals (or Matching) Concept – Materiality – Historical Cost – Consistency Accounting (Business) entity This concept states that the final accounts of the business will only contain information relevant to the actg entity – regardless of the legal entity. E.g. you own a taxi business, a hairdressing salon and your own home. Would you list all the assets, sales, profit of the businesses together? Why not? – The Acctg Entity concept says these must be recorded separately to provide meaningful data – Monetary Concept (Money Measurement) This concept states that in the business’ acctg system money must be used as the common denominator in recording and reporting all business transactions. This means all transactions must be recorded in the currency of the land. – (eg £ sterling in the UK – go figure). And only items that have a monetary cost can be recorded (eg staff loyalty or product quality can’t be recorded as it can not be measured in monetary terms) Duality This concept states there must be (at least) two accounts affected by each transaction. This creates a debit and credit side of the transaction, which leads to the double entry system. E.g. if I buy a car for cash, then the accounts affected are: – Vehicles (increase) – Bank (decrease) Going Concern This presumes that the business will continue trading into the foreseeable future. That is we assume that the business will not be being sold, closed or significantly reduced in the near future. This is important as it affect the recording of items in financial acc’s if the business is going to close. Therefore we prepare the financial records on the assumption that it will maintain trading (unless otherwise advised!) Accounting period concept As the Going Concern concept states the business will continue trading into the foreseeable future, the Accounting Period concept states that its life will be divided into periods of equal length. This enables the business to assess its performance and measure its financial achievements. Typically the accounting period is 12 months, and follows the financial year 1st April – 31 March (mirroring tax year). Accruals (or Matching) Concept This concept means that expenses and revenues for goods and services must be matched to the same time period they were incurred/earnt in. Basically: if the business sells goods on credit in the financial year 2022 but receives payment in 2023, then the sale belongs to the financial records of 2022 and not the financial year 2023. Materiality This concept basically says: “Don’t sweat the small stuff” Or, in more formal terms, only items that are of a material nature to information making need to be specifically identified. E.g. if GW spends £100 on a one off expense, that’s NOT material – bundle it into General/Sundry Expenses If GW spends £4,500 on car washes, it is NOW material and needs to be disclosed Historical Cost This concept is governed by a legal Financial Reporting Standard. The basic version is: all items must be recorded at the cost they were purchased for. – (this means the business must record the item for what they paid for it, not what its ‘worth’ to them. Yes, it’s different – why?) – Some assets (lands, buildings) can be re-valued in certain circumstances. – Note that re-valuing of assets was partly responsible for the Wall Street crash in the 80’s. Consistency This requires that, when a business adopts particular accounting methods, it should continue to use these methods consistently. This means that financial records are easier to read due to similar methods of preparation. Also changing accounting methods can lead to a serious impact on the calculation of profits/losses – and make financial analysis difficult. Financial accounts are used by many groups of people, so it is important that the information in the accounts should be: Relevant – Readers should be able to assess whether the business is using resources effectively and make informed economical decisions. Reliable – Information must be free of bias, free of errors and prepared prudently Comparable – Using appropriate acctg policies and presentation to aid identification of similarities and differences Understandable – Must be able to be understood by a reader with ‘reasonable knowledge of business and acctg. Now what? You need to prepare a publication! (SQUEE) – 3 A4 pages/slides summarising these concepts With pictures, and colours! Aren’t you the luckiest? – Makes the most of it...no more colours after today