Accounting concepts Cambridge IGCSE Accounting revision
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In plain words
Accounting concepts are the ground rules that every accountant follows. They make sure that two people given the same transactions would produce the same accounts, and that readers know what the figures mean.
10 things to know
- Business entity: the business is treated as separate from its owner. Only the business's transactions are recorded.
- Duality: every transaction has two aspects, recorded as a debit and a credit.
- Money measurement: only things that can be measured in money are recorded.
- Historic cost: assets and expenses are recorded at their original cost.
- Going concern: the accounts assume the business will carry on for the foreseeable future, so assets are not valued at what they would fetch in a forced sale.
- Matching (accruals): income and expenses are recorded in the period they relate to, whenever the money moves.
- Prudence: profit and assets should not be overstated, and liabilities should not be understated. Losses are provided for as soon as they are foreseen. Profits are not recorded until they are made.
- Realisation: income is recognised when the goods or services are transferred to the customer, not when the order is taken or the cash is paid.
- Consistency: the same accounting policies are used from one year to the next, so that results can be compared.
- Materiality: items of very low value need not be treated in the strictly correct way. A stapler is treated as an expense, not as a non-current asset.
Worked example
Name the concept applied in each case: the owner's private car is not included in the business's assets; a waste bin costing $8 is charged as an expense; the same method of depreciation is used every year.
- The owner's car belongs to the owner, not the business: business entity.
- The bin will last for years, but its cost is too small to matter: materiality.
- Using the same method each year: consistency.
Tips and tricks
- Learn one clear example for each concept. Questions describe a situation and ask which concept applies.
- Matching is about timing: the right period. Prudence is about caution: do not overstate. Inventory valuation and the allowance for irrecoverable debts are prudence. Accruals and prepayments are matching.
It lands in your notebook with its questions as flashcards.
Accounting concepts: 6 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which concept says the business is separate from its owner?
The owner's private transactions are kept out of the books.
Which concept is applied when an allowance for irrecoverable debts is created?
Assets and profit must not be overstated.
A calculator costing $6 is treated as an expense. Which concept applies?
The amount is too small to matter.
Which concept requires the same depreciation method to be used each year?
It lets one year be compared with another.
Which concept is applied when rent owing at the year end is included in the expenses?
The expense belongs to this year, though it has not been paid.
The skill of the staff is not shown in the accounts. Which concept explains this?
It cannot be given a reliable value in money.
Quiz
6 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 6 marks. Write your answers on paper, then check them.
Accounting concepts
Cambridge IGCSE Accounting 0452 · 6 marks · papermunch.org
Name ______________________________ Date ______________
Explain the going concern concept.[2]
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The financial statements are prepared on the assumption that the business will continue to operate for the foreseeable future.
Goods were sold on credit in December, and the customer paid in January. The year ends on 31 December. State in which year the sale is recorded and name the concept.[2]
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In the year ended 31 December, when the goods were transferred to the customer. The realisation concept.
Explain why a business values its inventory at the lower of cost and net realisable value. Name the concept.[2]
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So that the assets and the profit are not overstated. The prudence concept.
Answers: Accounting concepts
- 1. The financial statements are prepared on the assumption that the business will continue to operate for the foreseeable future.
- 2. In the year ended 31 December, when the goods were transferred to the customer. The realisation concept.
- 3. So that the assets and the profit are not overstated. The prudence concept.