Accounting Concept

1. Accrual & matching
(i) Revenues and costs are recognized as they are earned and incurred not as money is received or paid.
(ii) An expense has been paid in one financial period but the related revenue does not arise until a later one, the cost should be carried forward.
(iii) An expense is incurred in one period should be charged against the profit of that period whether or not it has been paid for by the accounting date.

e.g. Credit sales but not yet received should be treated as an income in current financial period.
e.g. Prepaid rent in current financial period should be treated as an expense in next financial period.

2. Consistency
(i) The similar accounting treatment must be given to similar items from one period to the next.
(ii) Change of method is consistent with the concept if
a) such a change gives a truer and fairer view to the financial position/operating performance and
b) there provides a justifiable reason and this change is significant enough

e.g. Same depreciation method used from one period to the next.
e.g. Same stock valuation method throughout.

3.Prudence
(i) Revenue and profits should not be anticipated but recognized only when they are realized in the form of cash or of other assets which can be treated as cash and assessed with reasonable certainty.
(ii) Provision should be made for any known liabilities at the end of the financial period.
* in the sense of valuation

OR

In case of doubts, accountants should choose a treatment which minimizes the reported figure of profit and asset valuation, or maximizes the reported figure of loss and liability valuation.

e.g. The adoption of the lower of cost or market value in the valuation of stock / Provision for doubtful debts on closing debtors.

4. Going concern
(i) An enterprise will continue in operational existence for the foreseeable future.
(ii) The financial statements do not indicate assets at net realizable values and are based on the assumption that the enterprise will not liqui

1. Accrual is a little bit different than Matching, but they are related. Accrual is base on what revenues/expenses have incurred, rather than what actual cash has received. E.g. If you asked someone to wash your window in April 30, and the person did the job (incurred) on the same day, but he told you that no worry to pay me now, his accountant would send you the bill. His accountant was sick and did not send you the bill until early June. The expense should be accrued in April 30 as the work had incurred. Sometimes, we also consider materiality. If the amount is $10 (immaterial), why bother to accrue the amount. Matching principle related revenue and expenses, which are recognized in the same period. In other word, your product sold in April 30, your costs of good sold should not be booked in May 1.

2. Consistency is how you apply the accounting principle, accounting treatment, methods, presentation, etc. Without consistency, you are not able to do comparison from time to time. E.g. Year 1, you use reducing balance for machine A depreciation/amortization, but year 2, you change to straight line, and year 3, change back to reducing…..

3. Prudence–neither overstates nor understates your estimation. For example, you cannot simply “appreciate” your assets. Thus, even in the best market time, your property may increase 100% in value, but you still need to keep its book value.

4. Going concern–it is the assumption of the business continuity. Think about why you need to do depreciation, if the company is closed down tomorrow. You do it because you put the assumption that the company is running and will running in a foreseeable time.

It sounds it is from SSAP 2….