The Basic Concepts Upon Which Financial Accounting is Based

The Basic Concepts Upon Which Financial Accounting is Based

Terms of Reference

To prepare a short report, which will explain the basic concepts upon

which financial, accounting is based. The need for accounting

standards and why companies must comply with them.

The Need for Accounting Standards

In order for the Profit and Loss and Balance Sheets accounts to make

sense to users who rely on them for their decision making purposes,

there has to be consistency in the way items are treated in the

financial statements. Without this agreement it would be impossible to

use them to compare business performance. Limited companies have a

statutory duty to comply with these rules and it is the job of the

qualified auditor to check this compliance. Partnerships and sole

traders are also often bound by these rules because of professional or

trade association standards or because of the conditions attached to

loans. The rules govern two aspects of accounting:

Ÿ The accounting treatments allowed for any individual event or

transaction. For example the rules state that stock must be valued at

"the lower of cost and net realizable value". This means that valuing

stock at selling price is not normally allowed.

Ÿ Disclosure requirements, which tell us the permitted layouts [called

formats] for the balance sheet and profit and loss, account items.

These rules are called Accounting Standards. In order for auditors to

be satisfied that the balance sheet and profit and loss account

provide a "true and fair view" of actual transactions they will

examine internal controls, which must be operating effectively in the

business. These control...

... middle of paper ...

...advance such as the prepayment of Insurance would be treated in this

way. The Profit and Loss account the figure of £1,800 is shown and is

deducted from the total expense payment. Similarly, expenses paid in

arrears, such as the Salaries payment of £3,500 found in the Profit

and Loss account must, although paid after the period to that they

relate, also be shown in the current period's profit statement: by

means of an accrual adjustments.

Bibliography

Financial Reporting Council 2004, About the FRC

[online], available

http://www.asb.org.uk

Biz/ed 2004, Accounting

[Online], available

http://www.bized.ac.uk

Hacker Young Chartered Accountants 2004, Accounts Explained

[online], available

http://www.account-explained.co.uk

Joe Corbett 2004, Class Notes, Borders College, Galashiels