Acca financial Accounting (FA) Study Text ac ca (FA)


The business entity concept



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The business entity concept 

This principle means that the financial accounting information presented in the 

financial statements relates only to the activities of the business and not to 

those of the owner. From an accounting perspective the business is treated as 

being separate from its owners. 

 

 



 

Chapter 1 

KAPLAN PUBLISHING



 

21 

The accruals basis of accounting 

This means that transactions are recorded when revenues are earned and 

when expenses are incurred. This pays no regard to the timing of the cash 

payment or receipt. 

For example, if a business enters into a contractual arrangement to sell goods 

to another entity the sale is recorded when the contractual duty has been 

satisfied. That is likely to be when the goods have been supplied and accepted 

by the customer. The payment may not be received for another month but in 

accounting terms the sale has taken place and should be recognised in the 

financial statements. 



Prudence 

Preparers of financial statements should exercise 



prudence

 when preparing 

financial statements. Assets and income should not be overstated whilst 

liabilities and expenses should not be understated. However, care must be 

exercised to ensure that there is not deliberate misstatement of assets

liabilities, income and expenses as that would introduce bias into the financial 

statements. Applying the principle of prudence helps to ensure that financial 

statements are fairly stated and can be relied upon by users.

 

Consistency 

Users of the financial statements need to be able to compare the performance 

of an entity over a number of years. Therefore it is important that the 

presentation and classification of items in the financial statements is retained 

from one period to the next, unless there is a change in circumstances or a 

requirement of a new IFRS Standard. Consistency of accounting treatment and 

presentation relates not only from one accounting period to the next, but also 

within an accounting period, so that similar transactions are accounted for in a 

similar way. 

 

 




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