Answer Posted / babai

Fundamental accounting concepts are enforced through
accounting standards and/or company law.

* Going concern concept: This concept states that we
must assume that a business will continue to operate for
the forseeable future and it follows that we should use
historical cost when valuing assets. In exceptional
circumstances, however, we are able to reject this concept.
For example, such curcumstances might include knowledge
that a company is short of cash and is likely to cease
trading shortly. In this circumstance we would prefer to
value assets at their expected sale price.
* Consistency concept: Once a businesses has decided
upon a method for the accounting treatment of an item, it
will enter all similar items that follow in the same way. A
business may decided to change its method for the
accounting treatment of items, but this should not be done
without a great deal of thought. If the change in method
has a material effect on the values disclosed in the
financial statements then the effects of the change should
be stated.
* Prudence concept: Caution will be exercised when
dealing with uncertainty, but not to the extent that
financial statements cease to be neutral (i.e. don’t be
more cautious than we need to be).
* Realisation concept: Rather than being a separate
concept, this is usually considered to be subsidiary to the
prudence concept. The realisation concept states that
profits should only be taken into account
when “realisation” occurs. Realisation occurs only when the
ultimate realised cash is capable of being determined with
reasonable accuracy (i.e. goods/services provided, buyer
accepts liability to pay, monetary value is agreed, and the
buyer is known to be in a position to pay). This is not the
same time that the order is received or the time that the
customer actually pays.
* Accruals concept: The accruals concept states that
net profit is the difference between the revenues earned
and the expenses incurred in generating those revenues
(i.e. Revenues - Expenses = Net Profit). Determining the
expenses used to generate revenues is known as “matching”
expenses against revenues. Key to the appreciation of this
concept is that all income and charges relating to the
financial period to which the financial statements relate
should be taken into account, regardless of the date of
receipt or payment.
* Separate determination concept: This concept states
that when determining the aggregate amount of each asset or
liability, the amount of each individual asset or liability
should be determined separately from all the rest. For
example, a business with 3 machines would record in the
balance sheet the sum of the individual values of the 3
machines.
* Substance over form concept: This concept states that
if the legal form of a transaction differs from its real
subsance then the accounting treatment should be in
accordance with the real substance of the transaction. For
example, a business undertaking the hire-purchase of a
vehicle will not own the vehicle until all installments are
paid and the option to take legal possession is exercised.
However, from an economic point of view the vehicle will be
used just as if it had been purchased outright. The correct
accounting treatment would be to show the vehicle being
bought via hire-purchase on the balance sheet as if it were
legally owned by the business, but also to show separately
the amount owed for it.

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