Chapter 11 Accounting Concepts Students

11 - 1 Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 2007

Book-keepingBook-keepingAccounting conceptsAccounting concepts

Chapter 11Chapter 11

11 - 2 Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma

Objectivity and subjectivityObjectivity and subjectivity

A value that everyone agrees to because it is A value that everyone agrees to because it is based upon a factual occurrence is said to be based upon a factual occurrence is said to be objectiveobjective..

Using one’s own judgement to arrive at a value is Using one’s own judgement to arrive at a value is said to be said to be subjectivesubjective..


International Accounting International Accounting StandardsStandards

The need for an IASB has mainly been due to:The need for an IASB has mainly been due to:

- Considerable growth in international investment.- Considerable growth in international investment.- Growth in multinational firms.- Growth in multinational firms.- Countries are developing their own standard-setting- Countries are developing their own standard-setting bodies.bodies.- Some countries cannot afford a standard-setting body - Some countries cannot afford a standard-setting body of their own.of their own.


Basic Basic accounting conceptsaccounting concepts

- Historical cost concept- Historical cost concept- Money measurement concept- Money measurement concept- Business entity concept- Business entity concept- Dual aspect concept- Dual aspect concept


1. Historical cost concept1. Historical cost concept

Assets are normally shown at cost price and thisAssets are normally shown at cost price and thisis the basis for valuation of the assetis the basis for valuation of the asset

Assets are normally shown at cost price and thisAssets are normally shown at cost price and thisis the basis for valuation of the assetis the basis for valuation of the asset


2. Money measurement 2. Money measurement conceptconcept

Accounting is concerned only with these facts: Accounting is concerned only with these facts: It can be measured in money (£, € or $), andIt can be measured in money (£, € or $), and

most people will agree to the ‘monetary’ value of themost people will agree to the ‘monetary’ value of thetransactiontransaction

Accounting is concerned only with these facts: Accounting is concerned only with these facts: It can be measured in money (£, € or $), andIt can be measured in money (£, € or $), and

most people will agree to the ‘monetary’ value of themost people will agree to the ‘monetary’ value of thetransactiontransaction


3. Business entity concept3. Business entity concept

Concerning only transactions that affect the firm, Concerning only transactions that affect the firm, separate from the personal activities of separate from the personal activities of

it’s private owner.it’s private owner.

Concerning only transactions that affect the firm, Concerning only transactions that affect the firm, separate from the personal activities of separate from the personal activities of

it’s private owner.it’s private owner.

Only two transactions:Only two transactions: Balance sheet: Balance sheet:- introduction of new capital- introduction of new capital increase of Capitalincrease of Capital- drawings- drawings decrease of Capitaldecrease of Capital

Only two transactions:Only two transactions: Balance sheet: Balance sheet:- introduction of new capital- introduction of new capital increase of Capitalincrease of Capital- drawings- drawings decrease of Capitaldecrease of Capital


4. Dual aspect concept4. Dual aspect concept

Dealing with both aspects of a transaction.Dealing with both aspects of a transaction.The concept states:The concept states:

Dealing with both aspects of a transaction.Dealing with both aspects of a transaction.The concept states:The concept states:

Assets = Capital ─ LiabilitiesAssets = Capital ─ Liabilities


4. Dual aspect concept4. Dual aspect concept

Double entry method: each transaction will get a debit and a credit entry on different accounts

Assets = Capital ─ LiabilitiesAssets = Capital ─ Liabilities

Separate accountsSeparate accounts

Other aspect: credit entryOther aspect: credit entryOne aspect: debit entryOne aspect: debit entry


Other importantOther importantaccounting conceptsaccounting concepts

Going concernGoing concernConsistencyConsistencyPrudencePrudenceRealisationRealisationAccrual conceptAccrual conceptSeparate determinationSeparate determinationSubstance over formSubstance over form

Going concernGoing concernConsistencyConsistencyPrudencePrudenceRealisationRealisationAccrual conceptAccrual conceptSeparate determinationSeparate determinationSubstance over formSubstance over form


Exercise 11.2 (a)Exercise 11.2 (a)accounting conceptsaccounting concepts

When preparing the final accounts of your company, name the accounting concepts you should follow to deal with each of the following:

When preparing the final accounts of your company, name the accounting concepts you should follow to deal with each of the following:

(a) Electricity consumed during the accounting period is still unpaid (a) Electricity consumed during the accounting period is still unpaid at the year end.at the year end.

(a) Electricity consumed during the accounting period is still unpaid (a) Electricity consumed during the accounting period is still unpaid at the year end.at the year end.


Exercise 11.2 (b)Exercise 11.2 (b)accounting conceptsaccounting concepts

(b) The owner of the company has invested her private assets in(b) The owner of the company has invested her private assets in the companythe company

(b) The owner of the company has invested her private assets in(b) The owner of the company has invested her private assets in the companythe company


Exercise 11.2 (c)Exercise 11.2 (c)accounting conceptsaccounting concepts

(c) A debtor who owes the company a large amount has been (c) A debtor who owes the company a large amount has been declared bankrupt, and the outstanding amount due to the declared bankrupt, and the outstanding amount due to the company is now considered to be irrecoverablecompany is now considered to be irrecoverable

(c) A debtor who owes the company a large amount has been (c) A debtor who owes the company a large amount has been declared bankrupt, and the outstanding amount due to the declared bankrupt, and the outstanding amount due to the company is now considered to be irrecoverablecompany is now considered to be irrecoverable


Exercise 11.2 (d)Exercise 11.2 (d)accounting conceptsaccounting concepts

(d) The company has suffered substantial losses in the past few (d) The company has suffered substantial losses in the past few years, and it is extremely uncertain whether the company can years, and it is extremely uncertain whether the company can continue to operate next year.continue to operate next year.

(d) The company has suffered substantial losses in the past few (d) The company has suffered substantial losses in the past few years, and it is extremely uncertain whether the company can years, and it is extremely uncertain whether the company can continue to operate next year.continue to operate next year.


Assumption of stability of Assumption of stability of monetary measuresmonetary measures

₤ 600.000 Is historically correct but with time interval of 20 years?

Problem is time value of money!

Bought 20 years ago a buildingBought 20 years ago a building against historical cost of: against historical cost of: ₤ 200.000₤ 200.000Built nowadays an identical building:Built nowadays an identical building: ₤ 400.000₤ 400.000Total costsTotal costs ₤ 600.000₤ 600.000

Bought 20 years ago a buildingBought 20 years ago a building against historical cost of: against historical cost of: ₤ 200.000₤ 200.000Built nowadays an identical building:Built nowadays an identical building: ₤ 400.000₤ 400.000Total costsTotal costs ₤ 600.000₤ 600.000

11 - 16 Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 2007

End of Chapter 11End of Chapter 11Accounting conceptsAccounting concepts

Chapter 11 Accounting Concepts Students

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