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Going Concern

The principle of going concern holds that preparation of financial statements should be based
on the assumption that a business will continue its operations for the foreseeable future and
for an indefinite period of time, hence it greatly affects the valuation of assets as presumably
there is no intention to sell the fixed assets of the business (Atrill & McLaney, 2013). It
provides the basis of depreciation since the assets are valued on a nonliquidation basis,
meaning that the value of fixed assets are to be gradually reduced by money regularly put
aside over their useful lifetime, rather than over a short period, since there should be no
expectation of early liquidation (Riahi-Belkaoui, 2004). Calculation of depreciation is done
because significant losses would arise in the event of a forced sale of fixed assets, hence,
these losses must be anticipated (Atrill & McLaney, 2013).
Since there is no intention of discontinuing trade and to sell fixed assets at the end of the
fiscal year, it is more relevant to use the loss of service potential, or depreciation method,
than the change in net realisable value (Elliott & Elliott, 2013). Thus, the procedure is to
assume that the consumed economic resource can be measured by the amortization that has
occurred due to the passing of time (Elliott & Elliott, 2013). For example, if a business leases
an equipment worth $80,000 for a year, with 10% depreciation per annum, then the amount
of depreciation (10% of $80,000) of $8,000 is treated as revenue expenditure in the income
statement for the fiscal year. The same amount is also deducted from the fixed assets in the
balance sheet.

Business Entity
This principle states that the business whether it is a sole proprietorship, a partnership, or a
corporation should be treated as a whole separate entity distinctly from the owner. Therefore,
only transactions of the business are recorded in the books of business whilst personal
transactions affecting the owners are not taken into account (Rajasekaran & Lalitha, 2011). In
other words, the records of a business are not allowed to mix with other entities (Hart, 2006).
According to this concept, even the investors are seen as creditors of the business which is
why capital is a liability which the business owes to its proprietors (Rajasekaran & Lalitha,
2011).
In reality, for sole proprietorships and partnerships, the owner and the business are of the
same entity meaning that the owner is also liable for the claims of creditors against the
business. Therefore, when the business goes bankrupt, the owner is legally allowed to recover
the companys debts from his personal resources. On the other hand, for limited companies,
there is a clear legal distinction between the business and its owners. Despite being
unrecognized by law in some form of organisations, for accounting purposes the business
entity principle is always to be taken as a base, hence it is applied to all forms of businesses
(Rajasekaran & Lalitha, 2011). For example, even though the law treats sole trader and his
business as one unit, the accounting principles treat them as two different units so personal
transactions of the owner, such as buying a house for his family, are not at all recorded in the
books of business. This is because the center of accounting interest is the business unit, not
the proprietor (Riahi-Belkaoui, 2004).

Historical Cost
The concept holds that only the figure of the acquisition cost of assets should be used in the
statement of financial position. Meaning that assets should be valued at their purchase cost
rather than at their current market value. The value of an item always stays the same as its
purchase price until it is sold or disposed of (Hart, 2006). The principle is called historical
cost concept because the acquisition cost, which is taken as a basis, relates to the past
(Rajasekaran & Lalitha, 2011).
It would be an inefficient procedure if accounting professionals are required to adjust their
asset values according to their market value as it is constantly changing (Rajasekaran &
Lalitha, 2011). Since the market value is generally lower than the recorded acquisition cost,
depreciation is applied to fixed assets in order to anticipate liquidation losses. The portion of
assets consumed during the accounting period, also known as expired cost, is charged as
depreciation (an expense) in the income statement, whilst the remaining part of the assets are
valued in the balance sheet.
Although this concept makes it more convenient for accountants, it is not necessarily more
accurate. For example, an old land purchased in the 90s for a cheap price of $180,000 could
possibly have a higher market value now for $500,000, however so, in the books it would still
be recorded as $180,000 (Hart, 2006). Thus, following this concept may result in overstating
or understating the value of assets. Financial information users are interested on the present
day worth of business, whereas the balance sheet depicts the value at cost price. In that sense,
the final accounts do not actually reflect the true financial position of a company, hence it
could mislead the investors (Rajasekaran & Lalitha, 2011).
Because all revenues and expenses in the income statement as well as the assets and liabilities
in the balance sheet are recorded at the amount that appears on the invoices, various parties
that deal with the business, such as lenders, will be convinced that the figures in all financial
statements are objective and not spoilt by subjective judgements made by directors or owners
(Elliott & Elliott, 2013).

Money Measurement
This principle is necessary so that transactions of all firms are recorded in a uniform manner.
In accounting, the chosen common denominator is the monetary unit, meaning that the
exchangeability of capital, goods, and services is measured in terms of money. Transactions
which cannot be expressed in monetary terms are not recorded in the books of account
(Rajasekaran & Lalitha, 2011). However, it restricts the scope of accounting as this means
that accounting does not take into account any relevant but non-monetary information, such
as product quality and working conditions of staff (Rajasekaran & Lalitha, 2011). In other
words, accounting information becomes essentially quantitative and past-oriented whilst nonaccounting information can be qualitative and future-oriented.
However still, this concept is inevitably important as a common unit of measurement is
needed in order to make necessary adjustments (adding and/or subtraction) in the financial
statements (Rajasekaran & Lalitha, 2011). Any information will be valueless with the absence
of a common measurement unit. For example, a business has a land of 1000 square metres,
building with 12 rooms, 150 chairs, 3 tonnes of raw material, 12 air conditioners, etc. If items
are expressed like this without any common measurement unit then their value cannot be
assessed. The purchase and sale of these items, if any, also cannot be quantified (Rajasekaran
& Lalitha, 2011). If the same is expressed in terms of money, such as a land of $300,000,
building worth $200,000, 150 chairs each at $40, 12 air conditioners each at $500, then the
total value can be fathomed. Furthermore, in the event of any addition due to purchase or
deduction due to sale the figures can be adjusted with the existing items (Rajasekaran &
Lalitha, 2011).
The drawback of this concept would be the ignorance and non-recordability

of many

important things that go on in the business, such as losing the most loyal and favourite
customer. As a result, revenue might decrease but user of financial statements may not know
the reason why (Hart, 2006).

Accounting Period
Periodicity concept holds that financial reports depicting changes in the firms wealth should
be of short-term and uncovered periodically (Riahi-Belkaoui, 2004), such as yearly, quarterly,
or monthly. All accounting periods of a company should be consistently of similar length
(Hart, 2006) in order to be able to compare financial statements from one year to another. The
duration of the period may vary from one company to another, although mostly they choose
an accounting period which coincides with the calendar year, that is, from 1 st of January to
31st December. However, if the business cycle does not match with the calendar year, it would
be most suitable to end the accounting period when the business activity has reached the
lowest point (Riahi-Belkaoui, 2004), meaning the accounting period may be a financial year
e.g. starting from 1st of May and ending on 30th of April of the following year (Rajasekaran &
Lalitha, 2011). By following this principle and closing off the financial reports at the end of
the period, accruals and deferrals such as prepaid expenses, unpaid wages, and uncollected
revenues, could be resulted (Riahi-Belkaoui, 2004).
Another way to choose a fiscal year end would be opting for one that ends when sales are at
their peak. This will result in cash balance and other balances to look as attractive as possible
(Hart, 2006). Most school textbook publishers would choose this type of accounting period.
For example, since the publishing company makes most of its sales in August when the
school sector purchased their books, its fiscal year end would be in September (Hart, 2006).
According to the going concern concept, the lifetime of a business is indefinite, hence it will
take a very long time to know the results of a business whilst users of financial statements are
much into knowing how things are going at frequent intervals. This is why this periodicity
concept was created in which a shorter and convenient time is chosen for measuring and
reporting income at specified intervals (Rajasekaran & Lalitha, 2011). Correct measures can
therefore be taken at appropriate time as a result of periodical evaluation.