Accounting Principles and Controls
What you must understand
Apply the accounting concepts: going concern, accruals (matching), consistency, prudence, business entity, materiality, realisation, and historical cost. Understand internal control over cash, inventory and receivables, including segregation of duties, authorisation, and bank reconciliation as a control. Know the purpose of provision for doubtful debts and the prudence concept behind it. Recognise the role of the auditor and the difference between internal and external control.
Traps in questions
- Confusing accruals (matching income and expenses to the period) with the cash basis.
- Applying prudence to justify deliberate understatement of assets.
- Forgetting that the business entity concept separates owner and business.
- Treating a provision for doubtful debts as a reduction of sales.
Worked example
Trade receivables $20,000; a provision of 5% is required. Provision = $1,000. If the existing provision is $600, the increase of $400 is charged as an expense in the income statement; the provision of $1,000 is deducted from receivables in the statement of financial position. Rule of thumb: only the movement in the provision goes to the income statement.