TABLE/SUMMARY/SNAPSHOT OF ACCOUNTING CONCEPTS/CONVENTION

Accounting Period

Concept

Also known as Time Period where business operation can be divided into specific period of time such as a month, a quarter or a year(accounting period)

Final accounts are prepared at the end of the accounting period ie one year. Internal accounts can be prepared monthly, quarterly or half yearly.

Accrual Concept

Requires all revenues and expenses to be taken into account for the period in which they are earned and incurred when determining the profit/(loss) of the business. The net profit/(loss) is the difference between the revenue EARNED and the expenses INCURRED and not the difference between the revenue RECEIVED and expenses PAID.

Business Entity

Also known as Accounting Entity convention which states that the business is an entity or body separate from its owner. Therefore business records should be separated and distinct from personal records of business owner.

Consistency Concept

According to this convention, accounting practices should remain unchanged from one period to another. For example, if depreciation is charged on fixed assets according to a particular method, it should be done year after year. This is necessary for purpose of comparison.

Dual Aspect Concept

Double entry system. For every debit, there is a credit entry of an equal amount.

Full Disclosure Concept

Financial statements should provide sufficient or relevant information to influence users’ decision making.

Going Concern Concept

The business will follow accounting concepts and methods on the assumption that business will continue its operation to the foreseeable future or for an indefinite period of time.

Historical Cost Concept

Business should report its activities or economic events at their actual cost. For example, fixed assets are recorded at their cost in accounts except for land which can be revalued due to application.

Materiality Concept

The accountant should attach importance to material details and ignore insignificant details otherwise accounting will be burdened with minute details. Only items that are deemed significant for a given size of operation.

Matching Concept

Profit is recognized by matching the income of the period with all expenses incurred in earning such income

Money Measurement Concept

Also known as Monetary unit. Transactions related to the business, and having money value are recorded in the books of accounts. Events or transactions which cannot be expressed in term of money do not find a place in the books of accounts.

Objectivity And Subjectivity

Objectivity is following rules of the industry and based on objective evidence and subjectivity is to follow ones own rules and methods

Prudence/Conservatism Concept

Take into account unrealized losses, not unrealized profit/gains. Assets should not be over-valued, liabilities under-valued. Provision are example of prudence or conservatism concept. Also under this prudence/conservatism concept, stock/inventory is value at lower cost or market value. This concept guides accountants to choose option that minimize the possibility of overstating an asset or income.

Substance Over Form

Real substance takes over legal form namely we consider the economic or accounting point of view rather than the legal point of view in recording transactions.

Realization Concept

Revenue is recognized when goods are sold either for cash or credit namely the debtor accept the goods or services and the responsibility to pay for them.

1.0 Activity-based costing(ABC) was developed/designed during the 1980s to avoid the shortcoming of absorption costing and marginal costing.

1.1 Shortcoming of Absorption costing –produce misleading product costs

1.2 Shortcoming of Marginal costing-does not attempt to connect general overhead costs to products. Also produce misleading product costs

2.0 CIMA defines ABC as:

· An approach to the costing and monitoring of activities which involves tracing resources consumption and costing final outputs. Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter use cost drivers to attach activity costs to outputs.

3.0 ABC is called a “ one-step cost attribution system” as costs are not apportioned between activities- the costs of each activity are related directly to products. Cost attribution is “the process of relating cost to cost centres or cost units using cost allocation or cost apportionment”

4.0 ABC can help managers to control (a) product costs because it concentrates their attention on the volume of each cost driver consumed by each product and (b) overhead costs because ABC highlights the cost per unit of each cost driver.

5.0 ABC is very effective in modern manufacturing firms where they have high overhead costs and in the service industry. In service industry, the units of service are often the cost drivers themselves.

6.0 The steps/stages involve in ABC are as follows:

(a) Identify all the activities which support production

(b) Collect the costs of each activity into cost pools ( Cost pools are similar to cost centres in absorption costing except that cost pools do no contained any apportioned costs)

© Find out what it is that causes the cost of an activity to increase. This is called its cost driver

(d) Calculate the cost per unit of each driver by dividing the value of each cost pool by the volume of its cost driver

(e) Find out how much of each driver is used in making each product

(f) Lastly, multiply the quantity of each cost driver used by each product by the cost per unit of each driver which gives a figure for the overhead attributed to each product.

7.0 When ABC is used for planning and budgeting, it is called activity based budgeting or ABB