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Accounting principles (Fair value method (Pricing an asset based on a…
Accounting principles
Fair value method
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Up to date, more relevant
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The matching principle
Displays the direct cause and effect relationship of transactions, tying expenses to revenues
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For example, instead of recording a 3million pound expense for a three year contract you'd record 1 million per year
Linked to accruals concept but not the same- accruals is regardless of payment but matching wants to join together cause and effect
Historic cost method
Pricing an asset based on original cost, only when current value can't be easily found
Easy to find, reliable, verifiable, unbiased
Quickly outdated, may not be relevant, concerns cost not value
Business entity concept
Theory that the business is seperate from it's owners, based on the two concepts that transactions are seperate from it's owners and from all other businesses
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The Duality concept
This suggests that all transactions should be recorded twice, with one for the debit action and one for the credit action
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This is the basis for the double entry accounting system- e.g. if inventories sold for cash then inventories decrease, cash increases and equity increases as wealth generated
If something occurs to assets, then something in liabilities/equity must occur and vice versa
Historic cost convention
Balance sheet assets must be recorded at historic cost, maximizing reliability
Fair value can be replacement value or realisable value so this is why historic is needed (unambiguous)
Normally now operate on a modified historic cost basis, a few fair value where this is very different from historic
The accruals concept
Expenses and revenues recorded in the period in which they occur, whether or not cash is recieved
This means that even if items are sold on credit they're still recorded, as it's very rare for physical cash payments
What is not recorded in that period goes onto the balance sheet as an asset until it's transferred onto the income statement of the later period
Stewardship
Stewardship is the concept of having an unbiased delegated person to perform a function on your behalf (a steward)- the concept of supervision
More efficient capital use as experts in charge of accounting, allows for better analysis and decisions- bridge between entrepreneurs and shareholders
If net realisable value is lower than historic cost, the net realisable value is used = 'impairment'
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Prudence concept
Requires accountants to record expenses/liabilities as soon as they occur, but only record revenues/assets once realised
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Goodwill
Arises when a company acquires another entire business. The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase.
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Only FIFO and AVCO are allowed under IFRS- but LIFO is allowed in US GAAP as lobbyists influence govt
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Listed companies comply with GAAP, IFRS and company policy whereas unlisted companies prepare with local GAAP and their policies