Quick questions on Accounting concepts and conventions - SQA Higher Accounting

Income is recognised when it is earned and expenses when they are incurred, regardless of when cash is received or paid. Expenses are matched against the revenue they help to generate in the same period. This is why we adjust for accrued and prepaid expenses and for income owing or received in advance before calculating profit.

Profits and assets should not be overstated and losses and liabilities should not be understated. Anticipate no profit, but provide for all foreseeable losses. This underlies recording a provision for doubtful debts and valuing inventory at the lower of cost and net realisable value.

Once an accounting method is chosen, for example a depreciation method, it should be applied the same way in each period. This lets users compare one year with the next. A change is allowed only with good reason and must be disclosed.

An item is material if its omission or misstatement could influence a user's decision. Immaterial items can be treated in the simplest convenient way, for example writing off a cheap stapler as an expense rather than treating it as a non-current asset and depreciating it.

The business is treated as separate from its owner. The owner's private transactions are kept out of the business accounts, and money the owner takes for personal use is recorded as drawings, not as an expense.

Only items that can be expressed reliably in money are recorded. A skilled, loyal workforce or a strong reputation, however valuable, is not shown as an asset because it cannot be measured objectively in money.

Assets are recorded at the cost actually paid for them. This figure is objective and verifiable from documents, unlike a current market value which is an estimate.

Name the concept that requires inventory to be valued at the lower of cost and net realisable value. [1 mark]

Explain why a loyal, well-trained workforce is not shown as an asset. [2 marks]

A business changes its depreciation method without explanation. State which concept is breached and why this matters. [2 marks]