The concept and principles of accounting

There is no denying the fact that accounting rules have been updated in course of time, which shows that every time a new accounting dilemma arises, the predicament has to be analysed and a solution hunted. Many accountants consider that what is mandatory is a abstract framework, rather than this gradually loom. In general terms, a conceptual framework is defined as “a statement of generally accepted theoretical principles which form the frame of reference for a particular field of enquiry”. Unfortunately, so far it has not been possible to decide on a coherent conceptual framework which resolves all problems in accounting, although it is possible that this will evolve over time. For the moment accounting standards are set to deal with problems in separate areas and theoretical inconsistencies remain. Fundamental concepts Despite the difficulties with a conceptual framework, it has been possible to identify some ideas of special significances. There are many concepts in accounting but four in particular are considered fundamental, namely:

• Going concern

• Consistency

• The prudence concept

• The accruals (or “matching”) concept

We will now discuss each of these in turn.

• Going Concern – From an accounting point of view, the going concern concept arises from the periodicity rule and assumes that the business will continue in the foreseeable future, unless we have evidence to the contrary. Why this continuation is so important, is that it underpins the measurement basis for the financial statements. If the enterprise is not a going concern, then the measurement and accounting rules will be different. Please note that the concept takes on additional importance for the auditor who will be stating to the users that the going concern basis has been used, unless the auditor believes to the contrary. EXAMPLE A shop is closing down. Normally where there is a continuing business stock would be valued at the lower of cost (what it paid for it) or net realisable value (what it can get for selling it). One would expect this to be cost, as the net realisable value will be higher where the shop is continuing to trade profitably. But if the shop is ceasing to trade it will sell off its stock for whatever (low) price it can get. In this case the accounts will use net realisable value which will be lower than stock.

• Matching - The concept of accruals and prepayments is embodied in the matching concept. By using either an accrued charge or a prepayment, the financial statements are adjusting to reflect what the business has consumed economically, as distinct from consuming in cash terms only. The payment of rent in advance is common business practice. The period in which it is paid is generally prior to the period in which it is consume