The accruals and going concern concepts

Deferred charges include costs of starting upobtaining long-term debtadvertising campaigns, etc. Deferred charges often extend over five years or more and occur infrequently unlike prepaid expenses, e.

The accruals and going concern concepts

Get Full Essay Get access to this section to get all help you need with your essay and educational issues. Discuss the advantages and disadvantages of these concepts, explaining the reasons why these concepts may be difficult to apply or may be inconsistent with other concepts.

Accounting statement and records are a periodic summary of account activity within a period and the documentations involved in the preparation of it Thomas and Ward, They are done based on a set of rules developed from the basic accounting concepts. It suggests that accounts should meet both the legal requirement and social expectation in communication with shareholders and other stakeholders Flint, However, a coin has two sides.

In this essay, the advantages and disadvantages of the accruals and going concern concepts will be discussed. The reasons why these concepts are difficult to apply will be given.

The conflicts between these two fundamental concepts with other concepts will then be further investigated To start with, the accrual concept refers to the matching of costs and revenues. It means the expenses must match against income when transactions occur rather than when cash payment is received or paid Marriott, Edwards and Mellett, The followings are the main advantages, disadvantages as well as the hardships while applying of the concept.

Firstly, it records the historical trend of business operations Vitez. The business transactions are more accurate which facilitates decision-making Hong Kong Finance Bureau, For the business owners, it gives the provision of the sales trends in certain economic conditions.

For example, it can be told by viewing the accrual basis accounts that which product can be produced more in the season to reach a higher profit. Secondly, it provides a better picture of financial performance as it matches the revenues with the costs of the activities Agarwal, It is because the business can still face a financial crisis when the account shows positive cash picture, because there may be some debts to be paid.

Matching the revenues and the costs of the business activities easily allows owners to see the more accurate income and debts flow of the firm which also helps decision-making. Moreover, the banks and lender could have a general estimation to the repayment ability by reviewing the financial statement prepared under the accrual concepts.

Nevertheless, accrual accounting is time consuming and therefore incurs the business additional labour costs Vitez. It usually requires business owners to spend more time reviewing transactions and making journal entries for expenses not yet paid and revenues not yet received Shanker.

It may create hardship to small business. Because of that, assumptions or decisions could be made. For example, even there is a profit in the profit and loss account, there may also be liquidity problems if the profits do not turn into cash. Under this concept, assets are valued at their historical costs which are based on their nominal or original amounts, adjusted for depreciation where applicable Harvey and Keer, The followings are the benefit and drawback of the concept.

One benefit of this concept is that it allows a business to draw a distinction between current and non-current asset. Current asset is the one that can turn into cash within a one-year period. Non-current assets will only be shown in accounts using going concern concept since the business is support to run long enough to have all the assets to be fully utilised.

Therefore, business can be measured and compared over different periods and this aids decision making for management and other related parties.

The accruals and going concern concepts

However, since the going concern concept suggests that assets should record at their historical cost, it ignores the inflation. Some of these assets are likely to be recorded less than the amount what they are actually worth.

The accruals and going concern concepts

That is why firms need to seek professional revaluation to adjust the value of the assets.The going concern concept is applicable to the company’s business as a whole. If, for example, a company closes a small business segment or discontinues one of its product and continues with others, it does not mean that the company is no longer a going concern because the going concern concept is applicable to the entity as a whole not to the particular segment of business or product.

There are a number of conceptual issues that one must understand in order to develop a firm foundation of how accounting works. These basic accounting concepts are as follows: Accruals concept. Revenues are recognized when earned, and expenses are recognized when assets are consumed.

This co. Separate Valuation each asset or liability must be valued separately. Materiality, only items material in amount or in their nature will affect . At the end of each reporting period, companies pass adjusting journal entries to record any accruals, for example accrual of utilities expense, interest expense, accrual of wages and salaries, adjustment of prepayments, etc.


Examples. The following examples elaborate the accrual concept. A deferral, in accrual accounting, is any account where the asset or liability is not realized until a future date (accounting period), e.g.

annuities, charges, taxes, income, deferred item may be carried, dependent on type of deferral, as either an asset or liability.

See also accrual.. Deferrals are the consequence of the revenue recognition principle . Generally Accepted Accounting Principles - There are general rules and concepts that preside over the field of accounting. These general rules, known as basic accounting principles and guidelines, shape the groundwork on which more thorough, complex, and legalistic accounting rules are based.

What Is the Accruals Concept? |