Cost and financial accounting Session 8 Notes

Fundamental Accounting Concepts/Principles – A Framework of Values

1. The Going Concern Concept

Accounts are kept on the assumption that the business will continue to operate in the future. We
assume that the business will continue to operate in the foreseeable future.

2. The Accruals Concept or Matching Principle

The accounts are (usually) being prepared by using the Accruals Basis – An expense has to be
accrued (provided) for. Sales and revenue have to be recognized – The period which they are earned
in are not the same when cash is received.

3. The Prudence Concept

The principle of exerting caution when dealing with financial accounting material. Prudence as
defined by VDV – “a mix of caution, being wise and judgement” – Gains can only be recognized when
they are “realized”. Losses and liabilities are to be recognized as soon as reasonably foreseeable.

4. Substance over Form Concept / Representational Faithfulness Principle

Reporting the actual numbers within accounting and bookkeeping rather than just doing it for the
legal part/ “Doing” for the sake of conforming – Rather “Doing” for the sake of accuracy. E.x. A
company not having leased assets on the balance sheet. As such not documenting them.

5. The consistency Concept

Keeping the same accounting methods within a business – Why ? For the sake of comparing – in case
we suddenly switch our accounting style, our previous documentation will not coincide with our new
one – as such making it harder to compare.