Observation

Candidates’ performance in this question which was on significance of some accounting concepts was below average. Some of the expected responses were:

• Accounting concepts are broad basic assumptions underlying the preparation and presentation of financial statements of organizations

•       (i) Accrual concept

This concept means that revenue and expenses are recognized when they are earned or incurred and not when cash is received or paid.
Significance:

• All arrears and prepayments for both revenues and expenses for a period are considered when preparing financial statements.
• The concept enables the actual profit or loss for a business of a particular period to be determined.                                        

      (ii)   Consistency concept

      This means that once an accounting method or procedure has been chosen for        reporting, that method should be used for a considerable period, unless     there is a sound reason to change it.
Significance:

• Consistency reduces element of subjectivity
• It enables comparison of performance of an organization at different periods to be made.                                                 

                        (iii) Going concern concept
This means that unless there is evidence to the contrary, the business           should be assumed to be in good condition and to operate in the foreseeable            future.
Significance:

• Going concern concept enables assets to be recorded at cost and not at saleable value;
• It also enables the cost of fixed assets to be spread over a number of years that the asset will be in use.

 (iv) Prudence concept
This concept means that revenues and profits are included in the financial statements only when they are realized but liabilities are provided for when there is the possibility of occurrence.
OR
The concept requires that all possible losses are provided for and profits should not be anticipated.

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Significance:
The concept enables:

• Stocks to be valued in terms of cost or net realizable value, whichever is lower;
• Profits not to be overestimated/anticipated;
• Holding gains to be ignored;
• Potential losses to be fully reflected in financial statements.

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