You are on page 1of 2

4c.

Accounting conventions & explanation of how have these been applied in the
production of the financial statements

Accounting concepts are implemented in order to sustain the concept of a true


and fair view which ensures the accuracy and consistency of the accounting
information given.
One of the many conventions is the one of periodicity, which assumes that the
business has a predefined accounting period (annually, half-yearly, 4 seasons)
and that the accounts need to be closed at regular intervals. It represents a
practical period, due to its short length, which allows people to offer brief and
relevant information, whereas a period of 3, 4 or more years is likely to lack
detail accuracy. In Susans financial statements the period is for the year 2011,
starting 1st January 2011 31st December 2011, allowing her to include any
transaction made.
A further important one is the going concern concept, according to which all
resources are valued at cost. It presumes the businesss existence will not be
interrupted in a foreseeable future, due to liquidation or other causes, and will be
able to achieve its goals and respect its commitments. In what concerns Susan,
she has taken a loan repayable in a 2 years period, outlining her optimistic view
regarding the situation of her business in the future, and also she has a closing
inventory of 8,250, which will represent the opening inventory for the next
financial year.
The matching convention maintains the integrity of the accounting equation,
ensuring the financial accounts of the period outlines exactly what was earned
and consumed. For instance, the cost of the fixed asset, the leasehold shop, is
spread, via depreciation, over the life of the asset (23 years) , in order to match
the cost with the periodic revenues it help generate. Also, the closing stock of
8,250 will be carried over to the next period as opening stock.
The last one, the monetary convention, implies that all accounting transactions
must be recorded in money terms, as it is the only way they can be quantified,
but also that the settlements must have the same currency as the country in
which they are held, for Susan in .