Accounting Concepts...

While making accounting statements a clear objective is that accounts reflect true and fair view. The true and fair view is applied to ensuring business activites are carring out properly. to ensure this application there are certain concepts and conventions which helps that accounts are maintained accurately. Different accounting concepts are as follows:



The Separate Entity concept: This means that the business is treated as a separate entity.i:e The business transactions are recorded separately and distinct from the personal transactions of the owner. 



Matching concept: Income and expenses are properly matched with a given accounting period i:e to which they relate.


Historical cost concept: According to the historical cost concept assets and liabilities are recorded at their historical cost. Historical cost means the cost that was initially paid for the acquisition of an asset, e.g. cost of an asset.


Going concern concept: An entity is a going concern if it has an intention to cease trading or shut off its operations nor The circumstances that may lead to the shutting off of the entity’s operations.
An entity should prepare its financial statements on going concern basis if it is to continue its operations in the near future.


Prudence concept: The prudence concept reveals that assets and incomes are not overstated, and liabilities and expenses are not understated.


Materiality concept: This implies that an information is material if its omission or misstatement in the financial statements may affect the decisions of the users of the financial statements.


Consistency concept: This means that accounting principles and policies shall be applied on a consistency basis from one period to another period.

DEPRECIATION

It is reduction in the value of fixed asset with the passage of time. As an asset is used, its value decreases which is due to wear and tear of that asset. This amount is charged as an expense and represents the benefit use during the period.Depreciation is a non cash expense. This decrease in value of asset is called depreciable value.


DEPRECIABLE VALUE:
Cost/ revalued amount of asset – residual value


RESIDUAL VALUE:
Scrape value of an asset at the end of its useful life. It is also known as N.R.V. (Net Realizable Value)
DOUBLE ENTRY:
Dr  Depreciation a/c
Cr  Provision for depreciation a/c


METHODS OF DEPRECIATION:
There are two methods of depreciation.
1. Straight Line Method
2. Reducing Balance Method


STRAIGTH LINE METHOD:
This is a method according to which a constant amount of depreciation is charged over the useful life of an asset.
It is calculated as follow:
Annual Charge=Cost – residual value /expected useful life


REDUCING BALANCE METHOD:
This is a method according to which the annual charge decreases over assets useful life there is a percentage given to charge depreciation.
It is calculated as follow:
Net book value = (Cost –Accumulated depreciation) * % of charge

Bad Debts

Accounts receivable that will remain noncollectable  and will be written off are known as irrecoverable or bad debts. They are shown as an expense in trading profit and loss account i:e income statement.


Double entry:


Dr:     Bad debt expense (I/S)


Cr:     Debtors


When a bad debt becomes good i:e the debt is collectd its entry is:


Dr:     Bank/Cash


Cr:     Bad debts recovered a/c


Provision for doubtful debts:


Companies make a provision for bad debts in advance at the year end which they consider will become bad debts in future. Prudence concept also states that provision is to be made for these doubtful debts. The reason for making provision is that the amount of  debtors reported in balance sheet is not overstated.


Double entry:


Dr:     Bad debts (P&L)


Cr:     Provision for bad debts (BS)


When the debt actually becomes bad the entry will be:


Dr:     Provision for bad debts (BS)


Cr:     Debtors a/c

Accruals & Prepayments

Accrual:
Accruals concept states that income and expenses must be recorded in the accounting records and reported in the financial statements of the period to which they relate.

Accruals are accrued expenses, they have not yet been paid for. Accruals are current liabilities.

Prepayment:
The payment of a debt in full before it is due. OR Payments which have been made in one accounting period, but should not be charged against profit until a later period because they relate to that later period.

If we pay for something that relates to next accounting period, we use a prepayment to transfer that charge forward to the next period. Prepayments are current assets.

KEY TERMS:

Accrued expenses:Expenses that has been incurred but not yet paid.

Accrued income:Income that is earned but not yet received.

Prepaid expense:Expenses that has not been incurred but has been paid in advance.

Pre-received income:Income that is not earned but received in advance.