Interactive worksheet: Accounting concepts and conventions

by Ken Delaney-Moore, Sheffield Hallam University

Aims:

This worksheet deals with:

• The need for objectivity and consistency within the accounting profession.
• The concepts of going concern, accruals, prudence, consistency, cost, materiality, business entity, money measurement, realisation and dual aspect.
• The main provisions of SSAP 2

After having completed the worksheet you should be able to explain these points.

Introduction

Imagine that you are a business owner, and you take copies of your financial records ('books') to six different accountants. You ask each one to calculate your profit for the year. A fortnight later they each provide you with their answers. There are six different profit figures, with very wide variations between them. What impression do you now have of the accounting profession?

To avoid this kind of situation arising various rules, or accepted ways of going about things have evolved. These rules are known as 'concepts' and 'conventions' (for our purposes there is no effective difference between a concept and a convention, so we shall refer to them as concepts). In addition, it has been necessary to draw - up further rules (known as 'Statements of Standard Accounting Practice' or S.S.A.P.'s, and more recently 'Financial Reporting Standards' or F.R.S.'s).

Together, all of these concepts and statements bring about consistency within the accounting profession, which of course is very important, both for the credibility of the accountants, and for the reliability of the financial results that they report.

In the following exercises it is assumed that you have already had some familiarisation with these concepts and conventions, and with "S.S.A.P.2".

Concepts and conventions

Q1. Complete the following sentences: (Type your answer)

S.S.A.P.2

Q2. Now complete the following sentences relating to S.S.A.P.2: (Type your answer)

Q3. Try now to fill-the-gaps in the following, again relating to S.S.A.P.2: (Type your answer)

Applying the concepts correctly gives a truer picture of profits

Q4. Suppose the first years' profit of Crosspool Bicycles was reported as £25,600. Suppose also that after this figure was reported, it became known that shop equipment with a cost price of £6,000 had been entered in full as an expense. The equipment was estimated to last for five years, after which it would be worthless. Fill the gaps in the following (don't use commas in the figures): (Type your answer)

Q5. The chairman of Aldred Components ltd reports a profit of £78,000 for the year. This includes an amount of £5000 relating to an order just received. Fill the gaps (no commas in the figure): (Type your answer)

Q6. During the year Rehana Kossar has taken home some clothing stock from her boutique, in order to wear it herself. She has included the cost of this stock (£1,200) as a business expense when calculating the profits as £28,800. Fill the gaps (no commas in the figure): (Type your answer)