Book-keeping

Accounting concepts

Chapter 11

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

 Objectivity and subjectivity

A value that everyone agrees to because it is

based upon a factual occurrence is said to be
objective.

Using one’s own judgement to arrive at a value is

said to be subjective.

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

 International Accounting
Standards
The need for an IASB has mainly been due to:

- Considerable growth in international investment.

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

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 3

 Basic
accounting concepts

- Historical cost concept

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

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 4

 1. Historical cost concept

Assets
Assets are
are normally
normally shown
shown atat cost
cost price
price and
and this
this
is
is the
the basis
basis for
for valuation
valuation of
of the
the asset
asset

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 5

 2. Money measurement
concept

Accounting
Accounting is is concerned
concerned only
only with
with these
these facts:
facts:
ItIt can
can be
be measured
measured in in money
money (£,
(£, €€ or
or $),
$), and
and
most
most people
people will
will agree
agree to
to the
the ‘monetary’
‘monetary’ value
value of
of the
the
transaction
transaction

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

 3. Business entity concept

Concerning
Concerning only
only transactions
transactions that
that affect
affect the
the firm,
firm,
separate
separate from
from the the personal
personal activities
activities of
of
it’s
it’s private
private owner.
owner.

Only
Onlytwotwotransactions:
transactions: Balance
Balancesheet:
sheet:
--introduction
introductionof
ofnew
newcapital
capital increase
increaseof
ofCapital
Capital
--drawings
drawings decrease
decreaseofofCapital
Capital

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 7

 4. Dual aspect concept

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

Assets
Assets == Capital
Capital ── Liabilities
Liabilities

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 8

 4. Dual aspect concept

Assets
Assets == Capital
Capital ── Liabilities
Liabilities

Separate
Separate accounts
accounts

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

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 9

 Other important
accounting concepts

Going
Going concern
concern
Consistency
Consistency
Prudence
Prudence
Realisation
Realisation
Accrual
Accrual concept
concept
Separate
Separate determination
determination
Substance
Substance over
over form
form

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 10

 Exercise 11.2 (a)
accounting concepts
When
When preparing
preparing the
the final
finalaccounts
accountsof
of your
your company,
company, name
name
the
theaccounting
accountingconcepts
conceptsyouyoushould
shouldfollow
followtoto deal
dealwith
with
each
eachof
of the
thefollowing:
following:

(a)
(a)Electricity
Electricityconsumed
consumedduring
duringthe
theaccounting
accountingperiod
periodisisstill
stillunpaid
unpaid
at
atthe
theyear
yearend.
end.

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

 Exercise 11.2 (b)
accounting concepts

(b)
(b)The
Theowner
ownerof
ofthe
thecompany
companyhas
hasinvested
investedher
herprivate
privateassets
assetsin
in
the
thecompany
company

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 12

 Exercise 11.2 (c)
accounting concepts

(c)
(c)AAdebtor
debtorwho
whoowes
owesthe
thecompany
companyaalarge
largeamount
amounthas
hasbeen
been
declared
declaredbankrupt,
bankrupt,and
andthe
theoutstanding
outstandingamount
amountdue
dueto
tothe
the
company
companyisisnow
nowconsidered
consideredto
tobe
beirrecoverable
irrecoverable

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 13

 Exercise 11.2 (d)
accounting concepts

(d)
(d)The
Thecompany
companyhas hassuffered
sufferedsubstantial
substantiallosses
lossesin
inthe
thepast
pastfew
few
years,
years,and
andititisisextremely
extremelyuncertain
uncertainwhether
whetherthe
thecompany
companycan
can
continue
continueto
tooperate
operatenextnextyear.
year.

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 14

 Assumption of stability of
monetary measures

Bought
Bought 2020 years
years ago
ago aa building
building
against
against historical
historical cost
cost of:
of: ₤₤ 200.000
200.000
Built
Built nowadays
nowadays an an identical
identical building:
building: ₤₤ 400.000
400.000
Total
Total costs
costs ₤₤ 600.000
600.000

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

Problem is time value of money!

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 11 - 15

 End of Chapter 11
Accounting concepts

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