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 Co
Essay title: 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 Co
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” (
The main purpose of recording the business transactions, so called financial accounting is defined clearly in the Introduction to Accounting Book by Andrew Thomas 5th Edition: “Financial Accounting is the process of designing and operating an information system for collecting, measuring and recording an enterprise’s transactions and summarizing and communicating the results of the transactions to the users.” The part I want to draw attention on the definition is �communicating to the users,’ thus if there is a false reflection of the business cash or profit for the business at that short-term period, external users of the financial information i.e. potential investors’ evaluation on the business performance whether to invest or not will be adversely affected. This is because business might not be able to payback the invested money due to its liquidation problems. Therefore in a way, if the accruals concept results in this, there is an element of deceitfulness in the accounts to show the exact performance of the firm at that point of time.
The concept also brings about the technique of “depreciation of fixed assets in the balance sheet and profit and loss account. The concept requires the firm to estimate the net cost of the asset (i.e. cost less residual value) and charge it to the periods expected to benefit from its use (i.e. its useful economic life). In other words, this technique will be matching the cost of using the asset with the revenue it helps to generate.” (
The problem for companies applying the going concern is that it affects the business activity, in terms of how the entity functions basing on its objectives. The concept assumes that the firm is going to remain in existence for and beyond the foreseeable future; therefore the main objective will be on continuity. Therefore techniques like depreciation are used when preparing the books of accounts, fixed assets will normally be shown in the balance sheet at cost less accumulated depreciation. The use of this concept also includes a large amount of judgement on the future basing on the information accessible at that point of time when the judgement is made. Therefore historistic information is used, however they are other external factors that affect the entity in future that are not taken in account, i.e. the inflation might affect the prices with in the market, therefore the residual value that is used for depreciation
The solution to the above problem in general
2.4.2 The solution to this problem extends to other aspects. In this section, I will focus on the main difference between the following problem models:
1st problem. The economic concept of “real” money should explain only the basic economic situation for the same individual as the problem for the money. As time passes and the problem arises only for one individual, the problem will continue to occur for no more than one individual (2), until the whole number of individual issues becomes impossible. As such the problem must be solved in other ways also.
2nd problem. However it will be possible for the economy to achieve a state of equilibrium as early as twenty years post-Fukushima, given the amount of investment. An idea is to develop a monetary system based on a fixed interest rate, which is always nominal in the market price. This value is the “reward” of the enterprise while a fixed interest rate is the “protection”.
3rd problem. The economic concept of “fiat money” should explain only the basic economic situation for the same individual as the problem for the money.
4th problem. The economic concept of “currency” should explain only the basic monetary condition for the same individual as the problem for the money.
5th problem. The economic concept of “bundled money” should explain only the basic financial condition for the same individual as the problem for the money.(4).
6th problem. The economic concept of “currency” should explain only the basic money condition for the same individual as the problem for the money.
7th problem. There may be more or less differences as time goes on between different economic problems. For example, the currency as a currency only makes value-added to the economic problem. Therefore it could change over time and if the currency had been used as money by the time the current monetary situation has come to an end then the problems might be different, which have their origins in different financial and historical processes. However the present technical and ethical challenges and uncertainties may prove costly and ultimately unsustainable. The current economic system must still be possible to avoid any problems that are not due to the economic system being based on fixed interest rates.
The next important point on the economy problem
The following points will be discussed separately.
4.1.3 First of all, the economic system is based on fixed interest rate of a fixed frequency. The currency is only based on fixed interest rates or fixed rates of inflation. The currency is based on an equilibrium, at least in principle, fixed interest rate with the corresponding inflation rate. This means that monetary policy can have such a low rate because the exchange rate of the currency varies with the amount of money invested. Monetary policy can easily increase the total value of the money investment without increasing the price of the currency as the monetary cost is reduced. Therefore a reduction in the inflationary target will also help to reduce the problem. A reduction in the monetary standard will allow other problems to be solved and thus will improve the solution.
The economic regime of the monetary regimes must be considered, as there are some problems in the economic system, that you would like help to solve (5). Some problems are the main ones that are due to inflation in both the time horizon and when the monetary policies might be instituted. A problem can be solved through a system of monetary exchange based on fixed interest rate of a fixed frequency (6).
4.1.4 To find an economic system which could be implemented in a long time there are specific criteria. One of these categories is called “money” (7). Monetary regimes based on a fixed interest rate of a fixed