GCSE-ready- Home
- Lessons
- IGCSE Accounting
- Accounting concepts
Accounting concepts
🎬 The doodle video for this lesson is coming soon. Subscribe on YouTube to see it first.
Accounting concepts are the basic rules that make financial statements reliable and comparable.
Entity, money measurement and consistency
Business entity: the business is treated as separate from its owner. Only business transactions are recorded; the owner's personal spending is not (except as drawings).
Money measurement: only items that can be measured in money are recorded. Staff skill or morale is not.
Consistency: the same methods (such as depreciation method) are used from year to year, so results can be compared.
Money measurement: only items that can be measured in money are recorded. Staff skill or morale is not.
Consistency: the same methods (such as depreciation method) are used from year to year, so results can be compared.
Prudence and accruals
Prudence: do not overstate profits or assets, or understate losses or liabilities. Record losses as soon as they are expected, but only record profits when they are earned. For example, make a provision for debts that may not be paid.
Accruals (matching): income and expenses are recorded in the period they relate to, not when cash is paid or received.
Accruals (matching): income and expenses are recorded in the period they relate to, not when cash is paid or received.
Materiality
Materiality: an item is material if leaving it out or misstating it would affect users' decisions.
Small items, such as a £5 stapler, can be treated as an expense rather than a non-current asset, even if they last for years.
Small items, such as a £5 stapler, can be treated as an expense rather than a non-current asset, even if they last for years.
An owner pays her own home electricity bill from the business bank account. How should it be treated, and which concept applies?
- It is not a business expense.
- The business is separate from the owner.
Answer: As drawings, because of the business entity concept.
Business entity: business separate from owner. Money measurement: record only money items. Consistency: same methods each year. Prudence: do not overstate profit or assets. Accruals: match income and expenses to the period. Materiality: small items can be simplified.
Check you have got it
Answer 7 quick questions with instant marking. If you get one wrong, GCSE-ready shows you why and gives you another go. It is free, and you do not need an account.