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. Two weeks 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'.
These concepts 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 familiarization with these concepts and conventions. (adapted from: www.bized.com)
WORKSHEET
Concepts and conventions Gap Fillers
Use the word bank to complete gaps below.
business entity - going concern - dual aspect
money measurement - materiality - prudence - consistency
(1) If a firm believe that some of its debtors may 'default' it should act on this by making sure that all possible losses are recorded in the books. This is an example of the ____________________ concept in operation.
(2) The fact that a business is separate and distinguishable from its owner is best exemplified by the ____________________ concept.
(3) Everything a firm owns, it also owes out to somebody. This co-incidence is explained by the ____________________ concept.
(4) If a cashier buys a cash book in which to keep his firm's books, he would not try to account for every single sheet of paper in the book because of the____________________ concept.
(5) The ____________________ concept states that if (say) the straight-line method of depreciation is used in one year, then it should also be used next year.
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