lecture_11-_introduction_to_accounts_2

lecture_11-_introduction_to_accounts_2 - MA826 11)...

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MA826 11) Introduction to Accounts II Accounting Concepts Accounting records and statements are based on a number of assumptions called accounting concepts. In December 2000 ASB published FRS18 “Accounting Policies” which sets out the current position on these concepts. Current trends are towards neutrality rather than prudence and towards “Fair Values” rather than historic cost.
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Accounting Concepts We will look at the eleven concepts considered most important: The cost concept The money measurement concept The business entity concept The realisation concept The accruals concept The matching concept The dual aspect concept The materiality concept Prudence The going concern concept Consistency
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The cost concept Fixed assets and goodwill arising on purchase are recorded at their original cost less depreciation to date, subject to a possible impairment writedown (IAS 36). The convention ignores inflation . Most investment type assets eg securities, derivatives and non owner occupied property are recorded at their fair value, but redeemable fixed interest securities may be held at amortised cost.
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Example A bond purchased at £70 per £100 nominal. The cost concept strictly applied But a more appropriate policy would be: It should keep this price in the book until it matures increase the book value gradually from £70 to £100 over the period to maturity
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For securities held in other companies the concept allows “fair values” to be incorporated into the balance sheet. There has been a move away form historical cost towards the revaluation of property and financial assets. IAS 38, IAS 39 and IAS 40 address this.
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The money measurement concept A business asset is reported in the balance sheet only if its value can be measured in money terms with a reasonable degree of precision. It simplifies accounting It ignores such items as goodwill, customer base, work force and brand loyalty. Does not provide an accurate reflection of the true value of the company.
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The business entity concept This fixes the boundary for the financial affairs contained in an accounting statement. The boundary is often the business, but it may be a
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lecture_11-_introduction_to_accounts_2 - MA826 11)...

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