Blacksacademy
Business Studies
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Subject: Accounting and Finance
Title : Accounting Principles and Window Dressing
Accounting PrinciplesThis section contains a survey of the underlying principles involved in accounting. It is possible to succeed with many accounting exercises without referring to these principles; however, these principles are natural and common-sense rules which bookkeepers, accountants and business people are required to follow in their detailed practice.
The principle of going concern.
This is the assumption that the business is not about to fail, and that all of the assets of the company can be valued on that assumption. As soon as a business buys a new asset, that asset’s market value goes down. This happens, for example, with the purchase of new cars. As soon as the car leaves the car-dealer’s showroom its resale value drops considerably.
However, in the accounts the actual value, and not the resale value of all assets is recorded. So the figure for the total fixed assets values everything at the price it was paid for. The loss of value due to wear and tear is recorded as depreciation, but the resale value of these assets, in the event of liquidation, might be very different.
The principle of consistency of method.
As this implies, the same methods must be used to calculate such things as stocks and depreciation from year to year. New methods can be employed, but if so, these must be indicated in the accounts. If consistency of method is not applied there is scope for intentional or unintentional fraud.
The principle of verification
This requires that all statements in the accounts must be capable of confirmation by independent persons. It also means that the totals of the revenues and expenditures must be capable of being matched with the figures in the books, ledgers and journals of the business.
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Subject: Accounting and Finance
Title : The Balance Sheet
What does the company own?The balance sheet answer the question: what does the company own?
We all keep a balance sheet of our own assets in our heads, and sometimes on paper too. The balance sheet of a company is just a more formal statement of the procedures we go through. We ask ourselves such questions as: what do I own? Do I have any immediate payments to make? By what date must I pay off the loan for the car?
Does anybody owe me money, and if so, when am I likely to get it?
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