Financial statements are prepared on the basis of recording income and expenditure when they are incurred and not when they are paid for. Expenses should always match the income that generates them. Example: prepayments and accruals.

Financial statement should be prepared on the basis that the entity will continue for the foreseeable future. Example: inventory is valued at lower of cost or net realisable value.

The accruals or matching concept requires that the revenue earned in a period is matched with the expenses incurred in earning that profit. Therefore if a payment includes a prepayment for the following period, this must be excluded from ex-penses in the statement of profit or loss. In other words, cost are recognised on the basis of the period covered by those costs, not by the timing of the payment.

Per paragraph 14 of IAS 10, a company would not prepare its financial statements on a going concern basis if management determines after the reporting period either that

• it intends to liquidate the company or
• to cease trading or that it has no realistic alternative but to do so.

The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

The main significance of the going concern concept is that the assets should not be valued at their ‘break-up’ value (the amount they would sell for if they were sold off piecemeal and the business were broken up).

Monetary measurement concept: This convention states that the accountant only records those facts that are expressed in money terms. Any facts, however relevant they may be to the user of the information, are ignored by the accountant if they cannot conveniently be expressed in money terms. Since it is difficult to expressed in monetary terms good industrial relations the value of GHȼ10,000 should not be recorded in the accounts of the business.

Materiality concept: This concept implies that insignificant items should not be given the same emphasis as significant items. The insignificant items are, by definition, unlikely to influence decisions or provide useful information to decision makers, but they may well cause complication and confusion to the user of accounts.

The convention can be applied to the classification of items as ‘revenue expenditure’ rather than ‘capital expenditure’. For example, the purchase of the door mats is strictly capital expenditure as they will be used over several years (and therefore they should be depreciated over their estimated useful life). However, their value is very small and therefore it is justifiable to treat them as revenue expenditure and include them in the income statement in the period in which they were bought.

Realisation concept: This convention states that we recognise sales revenue as having been earned at the time when goods or services have been supplied and a sales invoice issued. Sales revenue is not realised when a customer places an order, as at that stage it is too early to say whether an eventual sale will be made. On the other hand, we should not wait until the cash is received from a customer before recognising that a sale has been made. Since the goods have been sent to the customer and an invoice has been issued, sales revenue and a receivable of GHȼ3,000 should be recognised in the financial statements.

Item (i): Accruals/Matching concept : The matching of receipts and payments within an accounting period . Adjustments have to be made regarding early and late transactions both at the start and at the end of the accounting period . GHS21,600 of unpaid salaries has to be accrued in order to get the correct value of salaries expenses for the financial year.

Item (iii): Business Entity concept: Only the transactions of the business should be recorded in the accounts of the business. The owner’s private holiday is not a business expense and must be shown as drawings which reduces the amount of capital the owner has invested in the business.
Item (v): The Prudence concept requires a business to understate, rather than overstate, profit. Writing off an irrecoverable debt is an example of this, as this will increase expenses and thus reduce net profit. This action will also reduce the value receivables and hence current assets in the statement of financial position