OPPapers.com Essay Index >> Business >> The Isab Argues That The Accruals And Going Concern Concepts Are Key Underlying Assumption In The Preparation Of Financial Statements. Discuss The Problems For Companies In Applying These Accounting Concepts And Explain Why Other Concepts Might Also Be Considered To Be Important.
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The ISAB argues that the accruals and going concern concepts are key underlying
assumption in the preparation of financial statements. ...
Submitted by shamila4jc on May 10, 2008
Category: Business
Words: 1306 | Pages: 6
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Accruals concept is the concept that attempt to correctly match all the accounting expenses (cost) to the income (revenues) to the year at which it occurs at that accounting period, thus referred to as accrued expenses. Whilst a going concern is an assumption that every business will continue in operation for the anticipated future, thus is a going concern for several years, unless if there is evidence i.e. owner acknowledgement. In the Introduction to Accounting Book by Marriott, Edwards& Mellett 3rd Edition it states, “The going concern concept assumes that the business is a permanent venture and will not wound up in the foreseeable future”
However, problems might arise in companies applying the two concepts, accruals and the going concern. Firstly looking at the accruals concept, “Under the accruals concept, revenue and costs are credited or charged to the profit and loss account for the year in which they are earned or incurred, not when any cash is received or paid” (http://www.tutor2u.net/newsmanager/templates/?a=1373&z=82 ) . Therefore this manipulates the accounting statement in way that income shown is not what the business received and then the concept attempts to spread the cost. Thus the concept provides a false picture as to what cash reserves are available within the business, which could result in serious cash flow problems. For instance, the income ledger may show thousands of dollars in sales, while in reality the bank account is empty because debtors haven't paid you yet, therefore the problems will arise when the debtors finds it hard to pay off the credit, or they might delay with their payment due to unforeseen factors this will then affect the company’s working capital, which is the amount the business have for day to day expenses. Thus, the profit indicated in the profit and loss account or the balance sheet is unrealistic, in short terms this reflects a false picture on the actual business performance at the end of the...
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