Fundamentals of Accounting

In: Business and Management

Submitted By MarkWoon
Words 8216
Pages 33
Wise people speak because they have something to say. Fools speak because they must say something."
Don't predict the future, invent it.

Davies, Tony & Crawford, Ian 2012, ‘Financial Accounting”, Pearson, Harlow.
Pg 7
Prudence Concept
Prudence means being careful or cautious. The prudence concept is an ethical concept that is based on the principle that revenue and profits are not anticipated, but are included in the income statement only when realized in the form of cash or other assets, the ultimate cash realization of which can be assessed with reasonable certainty. Provision must be made for all known liabilities and expenses, whether the amount of these is known with certainty or is a best estimate in the light of information available, and for losses arising from specific commitments rather than just guesses. Therefore, companies should record all losses as soon as they are known, but should record profits only when they have actually been achieved in cash or other assets.
Consistency concept
The consistency concept is an ethical rule that is based on the principle that there is uniformity of accounting treatment of like items within each accounting period and from one period to the next. However, as we will see in Chapter 3, judgement may be exercised as to the application of accounting rules to the preparation of financial statements. For example, a company may choose from a variety of methods to calculate the depreciation of its machinery and equipment, or how to value its inventories. Until recently, once a particular approach had been adopted in all future accounting periods, unless there were compelling reasons to change. The ASB encourages their change, if those changes result in showing a truer and fairer picture. If companies do change their approaches then they have to indicate this in their annual reports and accounts.

The going…...

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