Money Measurement, Business Entity, Going Concerned and Other Accounting Concepts - Essay Example

Money measurement

The money measurement concept focuses on quantitative transaction rather than qualitative. Therefore, this implies that businesses should only keep record of transactions that are measurable or that can be expressed in monetary terms (Kieso, Weygandt & Warfield, 2010). In most businesses, a sizeable number of items and information do no feature in their financial records. This is because the said items cannot be measured in monetary terms. Examples of these items include working condition of the employees, customer satisfaction and the employees’ competence. However, according to the IFRS, any item or event that cannot be recorded in the financial statement should be disclosed in the accompanying notes of the statements. This will help the users of the financial information to understand the financial position of the business better. The accounting concept of money measurement can be explained better by reviewing the financial statements of Apple Inc for the year ended September 2013 (Kieso, Weygandt & Warfield, 2010). The section containing the accompanying notes reveal an improvement efficiency of the company’s production process following the hiring of new key personnel.

Entity

According to the concept of business entity, the assets and liabilities of a business should be separated from those of the owners or any other business. Therefore, this implies that the transactions should be recorded in different accounts to separates the transactions made on behalf of the owners and those of the business. The absence of this concept would lead to a mix up of the transaction made by multiple entities. A key limitation of this concept is that it provides a corporate veil that shields the owners from any litigation for fraud they may have committed on behalf of the company. Apple Inc is a corporate entity and a major player in the technology industry. The owners (major shareholders) of the company exist as a separate entity from the company. In the statement of financial position of Apple Company for the year ending September 2013, the assets and liabilities of the company are provided separately from those of the owners. The statement also provides the company’s tax payable computed at a rate different from those of the owners.

Going concern

The concept of going concern is an assertion provided by audit report indicating that a particular entity will continue running its business operations for a foreseeable future (Kieso, Weygandt & Warfield, 2010). This is implies that based on the financial statements reported by the company, it is less likely to stop its operations or fall under receivership in the near future. By concluding with this presumption, the company’s accountants are vindicated in pushing forwards the recognition of particular expenses to a future date, when the entity will still be operational. A key limitation of the concept is that it is not clearly outlined in the Generally Accepted Accounting Principles (GAAP); therefore, it can be interpreted in numerous ways. However, the auditors are provided with clear instruction by the GAAS pertaining the consideration of the ability of a company to remain in business. In the 2013 audit report of Apple Inc, the auditor confirmed that the company was a going concern in that particular year despite of the number of litigations against it. The assumption was arrived at following an in-depth analysis of the company financial records.

Cost

The accounting concept of cost requires entities to record the assets at the initial acquisition cost. The cost principle is commonly used to record most of the transaction since the value of the transactions are verifiable at a future date using the initial purchase price. The principle is widely referred to as the historical cost principle since it entails the use of sunk cost. A key problem with the use of this principle is that it does not provide an accurate reflection of the entity’s financial position. This is because the value of the asset recorded using initial purchase price may have change immensely since the time of acquisition. In the case of Apple Inc, the fixed assets (property, plant and equipment) are recorded at the initial cost in which the cumulative depreciation is deducted as well as the initial value of any fixed asset sold before the end of the 2013 financial year.

Dual aspect

The concept of dual aspect requires business entities to record their transaction through double entry (Gassen & Schwedler, 2010). This helps the business to provides financial statement that can be relied by the stakeholders when examining the financial performance of the business. The concept is founded on the accounting principle that equates assets with equity and liabilities. The accounting principle is evident in the audited statement of financial position of Apple Inc for the year ending September 2013. The company’s balance sheet is prepared in a manner that equates the company asset (fixed and current) to liabilities (current and noncurrent) and equity.

Accounting period

The accounting period is the period that reflects the financial events that took place during a particular time span. In most organizations, the period is usually annual or quarter. However, it should be noted that although the time span is usually similar, the end and start date are usually different. Not all organizations financial year begins on January. The annual financial report of Apple Inc reveals that the company’s fiscal year spans from October to September. Apple Inc usually publishes most of its financial statements towards the end of the fiscal years. The statements include income statements, balance sheet and statements of cashflow.

Conservatism

The conservatism concept requires businesses to recognize expenses within the shortest time possible particularly when the outcome is uncertain. Conversely, the assets and income should be recognized when their receipt is assured. Therefore, this implies that when provided with a variety of outcomes whose occurrence probability is equally likely, it is important to account the transaction that provides a lower profit. The principle of conservatism further requires business to record a loss if there is uncertainty of incurring it. On the other hand, the business should not record an income if it is uncertain. Apples Inc record its inventory by considering the lower value of either the initial purchase price of the current market price. Adoption of this policy is quite beneficial to the company since it lower the amount of tax payable (Gassen & Schwedler, 2010). Therefore, this has earned the principle the term the prudence concept. The allowance of the doubtful debt is recorded as an expense in the income statement of Apple for the 2013 fiscal year and has set aside a reserve for obsolescence. This is an indication of the conservatism principle where as a prudent entity Apple set aside a particular amount in anticipation of future expense.

Realization

The realization concept is also referred to as the accrual concept that requires entities to recognize cost when they accrue. Conversely, the revenues should be recognized when earned regardless of whether the entity has received the payment for transaction or not (Gassen & Schwedler, 2010). Apple Inc applies this concept when recording the revenues received from the sale of its mobile devices. The revenue is recognized once the ownership of the devices has been transferred to the buyer and payment is received for it. The revenue for the items sold on credit are recognized once the entire payment consideration has been received. The realization concept is quite beneficial to the company since it ensures that the financial statement provides an accurate reflection of the amount of revenue earned.

Matching

According to the matching concept, businesses should record the expenses incurred in the income statement in the same period the revenue that relate to the expenses was earned. Companies that do not apply this principle record their expense during the financial period in which they were paid regardless of the period the revenue that relate to the expenses was earned (Weygandt, Kimmel, Kieso & Elias, 2010). The application of the matching concept result in deferral of prepayment in an attempt to match them with the revenue earned at different period. Conversely, accrued expenses are recorded in the profit and loss statement in period in which they were incurred. Based on the Apple financial statements of year ending September 2014, the cumulative depreciation of previous accounting periods is charged on the net book value of the fixed asset. The depreciation charge spans for the entire economic life of the asset. The major benefit of the matching principle is that it allows the company to provide a balanced and an accurate view of the firm’s financial position.

Consistency

The consistency concept requires entities to maintain an accounting principle adopted and abide by it consistently. However, the principle provide an exception if the accounting principle become outdated and there is a new version that augment financial reporting (Gassen & Schwedler, 2010). The consistency principle usually guide the opinion of the auditor concerning the financial statement of a company. in certain instances, an auditor may fail to provide an opinion on a firms financial statement if they realize an explicit contravention of the principle. The auditor report on Apple Inc financial statement indicates the company’s consistency in the accounting for depreciation.

Materiality

The materiality concept allows business entities to ignore certain accounting standards if they have an infinitesimal effect on the entities’ financial statement. According to GAAP, an item is considered immaterial if it has a small impact on the financial statements. A key limitation of the materiality concept is that there is no clear guidance that allows a business entity to differentiate a material item from an immaterial. A litigation of $500,000 is an immaterial cost to a company like Apple, therefore, such an amount is not necessarily recorded in the company’s income statement.