The accruals concept brings a meaning that every expense should be recognized as they occurred. (Wild, Shaw, & Barbara, 2009) For examples, when an expense incurred, we need to record it in the financial report, not when payment is made. While we receive the goods, we need to record the revenues. We need to record the net profit using the formula of net profit is equal to total revenue – total cost. So that, we get a more accurate amount of profit for net profit is not equal to total revenue.
When non-compliance of historical cost concept, the value of the assets is not objective and not reliable anymore since the evidence of transaction is not shown. Additionally, the market price changes often according to time period and that’s why some users will prefer market value as it is more relevant. At current value, it will distort the whole fabric of accounting. It makes accounting information unreliable. If monetary concept is not practiced into the business, the condition as he unit used for measurement of value is not the same; the information in the financial statement couldn’t be compared as it’s not the same of the real value.
Sample Concept Paper For Business
Certain information such as the value of workers and the types of goods will not be recorded into the financial as they do not a price for it. If going concern concept is not applied, the business is expected to shut down if the business is facing financial crisis. Therefore, this business would have a negative or pessimistic thinking and this would give a bad image to the public and shareholders. The business might have a hence to revive their business in the future but if they do not have a positive or optimistic thinking, their business would have a high chance of facing bankruptcy if they faced a financial crisis.
The information in the financial statement can’t be compared anymore, when time interval concept is not used. For example, if the financial statement of a company is prepared annually and the next one is closed in half year, then we can’t compare these two financial statements because there are many transactions happen during the time interval, the profit calculated will be not name. Due to the reason the information in the financial statement is no longer reliable. Thus, there would be lesser potential share buyers interested in the company due to unreliable information.
When non-compliance of business entity concept, the information in the financial statement won’t be appropriate because unrelated information of the owner will be recorded in the financial statement. This will affect the profit and loss of the business because the owner personally expenses and revenues will be recorded in the financial statement. For example, the capital will e taken in as a drawing thus counted as a liability to the business when the owner invested ARM 100,000 into the business. If this concept is not used, the investment won’t be record as a drawing.
If accrual concept is not applied, the information in the financial statement won’t be trustworthy anymore. The expenses wont be recorded when expenses incurred. It will be recorded when payment is made while. If revenues and expenses are recorded when payment made, the profit and loss of the business will become not accurate. Four qualitative characteristics that a uncial statement should posses: Understandability – While preparing finance statement, the most significant things is the information should be easily understood by the public and able read through it easily.
Relevant information need to be organized under a connected group. This is because it enables public to measure and give Judgment to the performance of the business easily with the accurately reliable information. CITATION we 1 17417 (Wood & Gangster, 2012)Relevance – The information in financial statement should be materialistic, as it stands as an important point to stakeholders to make a decision while using the information from the financial statement.
Furthermore, materiality is one of the relevance criteria, as all the information we find out should be linked to evaluate past evaluation. It also enables the public to predict the future performance of the company. CITATION we 17417 (Wood & Gangster, 2012)Reliability – Reliable information will be useful to users as it doesn’t include any wrong material. Faithful representation is one of the criteria of reliability in the accounting balance sheet. The transaction must represent accurately as at the reporting date. Another criterion in