For each of the following statements, identify the accounting concept involved and briefly explain the correct accounting treatment in each case.
i) A business has good industrial relations and wishes to record this in the accounts at a value of GHȼ10,000. (3 marks)
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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.
ii) A business has bought two door mats costing GHȼ2 each. These are expected to last many years and have been recorded under non-current assets. (3 marks)
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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.
iii) Goods to the value of GHȼ3,000 were dispatched to a customer in the final month of the financial year. The invoice for these goods has been issued but no cash has been received from the customer. No entry has been made in the accounts at the financial year end. (3 marks)
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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.