(65)-THE MONEY MEASURMENT CONCEPT

The Money Measurement Concept

The money measurement concept states that accounts will only deal with those items to which a monetary value can be attributed.

For example, in the balance sheet of a business monetary values can be attributed to such assets as machinery and stocks of goods.

The money measurement concept introduces limitations to the subject matter of accounts. A business may have intangible assets such as the flair of a good manager or the loyalty of its workforce. These may be important enough to give it a clear superiority over an otherwise identical business, but because they cannot be valued in monetary items they do not appear anywhere in the accounts.

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(64)-THE CONSISTENCY CONCEPT

The Consistency Concept

The consistency concept states that similar items should be accorded similar accounting treatments.

Accounting is not an exact science. There are many areas in which judgment must be exercised in attributing money values to items appearing in accounts. Over the years certain procedures and principles have come to be recognized as good accounting practice, but within these limits there are often various acceptable methods of accounting for similar items.

The consistency concept states that in preparing accounts consistency should be observed in two respects.

1. Similar items within a single set of accounts should be given similar accounting treatment.
2. The same treatment should be applied from one period to another in accounting for similar items. This enables valid comparisons to be made from one period to the next (sometimes this called the comparability concept).

Consistency has been sidelined to a certain extend by financial reporting standards. In financial reporting standards is more consider which accounting policy is most appropriate and then apply this policy to give a true and fair view. Changing an accounting policy may contradict the consistency concept.

(63)-THE PRUDENCE CONCEPT

The Prudence Concept

The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected should be the one which gives the most cautions presentation of the business’s financial position or result.

The importance of prudence has diminished over time. Prudence is a desirable quality of financial statements but not bedrock. The key reason for this charge of perspective is that some firms have been over pessimistic and over stated provisions in times of high profits in order to profit smooth.

You should bear this is in mind as you read through the explanation of prudence. On the one hand assets and profits should not be overstated, but a balance sheet must be achieved to prevent the material overstatement of liabilities or losses.

(62)-THE ACCRUALS CONCEPT OR MATCHING CONCEPT

The Accruals Concept or Matching Concept

The accruals concept states that revenue and costs must be recognized as they are earned or incurred, not as money is received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed, and debit with in the profit and loss account of the period to which they relate.

Financial Reporting Standards also stipulates that financial statements must be prepared under the accruals concept. This concept is a cornerstone of present day financial statements.

Essentially, the accruals concept states that, in computing profit, revenue earned must be matched against the expenditure incurred in earned it.

The companies act gives legal recognition to the accruals concept, stating that, all income and charges relating to the financial year to which the accounts relate shall be taken into account, without regard to the date of receipt or payment. This has the effect, as we have seen, of requiring business to take credit for sales and purchases when made, rather than when paid for, and also carry unsold stock forward in the balance sheet rather than to deduct its cost from profit for the period.

Example,

If company Y makes 20 shirts at a cost of 100$ and sells them for 200$, she makes a profit of 100$. However, if company Y had only sold 18 shirts, it would have been incorrect to charge its profit and loss account with the cost of twenty shirts, as it still has 2 shirts in stock. If it intends to sell them in June it is likely to make a profit on the sale. Therefore, only the purchase cost of 18 shirts 90$ should be matched with its sales revenue, leaving it with a profit of 90$.

(61)-THE GOING CONCERN CONCEPT

The Going Concern Concept

The going concern concept implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.

Financial reporting standards 18 stats that the financial statements must be prepared under the going concern basis unless the entity is being or is going to be liquidated or if has ceased trading. The directors of a company must also disclose any significant doubts about the company’s future if and when they arise.

The main significant of the going concern is that the assets of the business should not be valued at their break up value, which is the amount that they would sell for if they were sold off piecemeal and the business were thus broken up.

(60)-ACCOUNTING CONVENTIONS

Accounting Conventions

Accounting Practice has developed gradually over a matter of centuries. Many of its procedures are operated automatically by people who have never questioned whether alternative methods exits which are just as valid.

However, the procedures in common use imply the acceptance of certain concepts which are by no means self evident; nor are they the only possible concepts. These concepts could be used to build up an accounting framework.

• The going concern concept
• The accruals or matching concept
• The prudent concept
• The consistency concept
• The entity concept
• The money measurement concept
• The separate valuation principle
• The materiality concept
• The historical cost concept
• The stable monetary unit
• The objectivity concept
• The realization concept
• The duality concept
• Substance over from
• The time interval concept