A level-readyAll subjects · Accounting · WAC11 The Accounting System and Costing
Accounting concepts and conventions
Edexcel IAL Accounting · WAC11 The Accounting System and Costing
Concepts are the agreed rules behind every figure in the accounts. You must be able to name, explain and apply them to a situation (spec 1.1.8 and 1.1.9).
Going concern, prudence, accruals, consistency
| Concept | Meaning | Example |
|---|---|---|
| Going concern | The business is assumed to continue for the foreseeable future | Assets are shown at cost less depreciation, not at what they would fetch in a forced sale |
| Prudence | Be cautious: do not overstate assets or income, or understate liabilities or expenses | Allowance for irrecoverable debts; inventory at the lower of cost and net realisable value |
| Accruals (matching) | Income and expenses are recognised in the period they are earned or incurred, not when cash moves | Accrued and prepaid expenses; depreciation spreads cost over useful life |
| Consistency | The same methods are used from one period to the next | Keeping the same depreciation method so profits can be compared |
Historic cost, materiality, money measurement, realisation, business entity
| Concept | Meaning | Example |
|---|---|---|
| Historic cost | Assets are recorded at their original cost | Land bought for £80,000 stays at £80,000 even if worth more now |
| Materiality | Items too small to affect users' decisions may be treated in the simplest way | A £15 stapler is expensed, not depreciated over 10 years |
| Money measurement | Only items that can be measured in money are recorded | A skilled workforce or good staff morale is not in the accounts |
| Realisation | Revenue is recognised when goods or services pass to the customer, not when an order is taken or cash received | A sale on credit is revenue on delivery |
| Business entity | The business is treated as separate from its owner | The owner's private car or private bills are not business expenses; goods taken are drawings |
Applying concepts in the exam
A typical question gives a situation and asks which concept applies or whether it has been followed. Name the concept, explain it in one sentence, then apply it to the figures: for example, 'The owner paid his home electricity of £600 from the business bank account. Under the business entity concept this is drawings, so expenses are overstated and profit understated by £600.'
Worked example
Inventory cost £12,000. Because of a change in fashion it can only be sold for £9,500, with selling costs of £500. At what value should it be shown, and which concept applies?
- Net realisable value = 9,500 - 500 = 9,000.
- Inventory is valued at the lower of cost (12,000) and net realisable value (9,000).
- Showing 12,000 would overstate the asset and profit.
Answer: £9,000, applying prudence (the lower of cost and net realisable value).
Check yourself
- A sole trader pays her private car insurance from the business bank account and records it as a business expense. Which concept has been broken?
- Realisation
- Going concern
- Business entity
- Historic cost
Show answer
Business entity. The owner's private costs are drawings, not business expenses.
- A business writes off a £12 calculator as an expense immediately instead of depreciating it. Which concept allows this?
- Materiality
- Consistency
- Money measurement
- Realisation
Show answer
Materiality. The amount is too small to affect any user's decision.
- A customer places an order in December for goods to be delivered in January. When should the sale be recognised?
- December, when the order is taken
- When the customer finally pays
- January, when the goods are delivered
- Only when the invoice is paid in full
Show answer
January, when the goods are delivered. Realisation: revenue is recognised when the goods pass to the customer.
- Why does a statement of financial position not include the value of a loyal, highly skilled workforce?
- Prudence
- Money measurement
- Accruals
- Going concern
Show answer
Money measurement. Only items that can be reliably measured in money are recorded.
- A business is expected to close next month. Which concept would no longer apply, so its assets should be valued at what they would fetch on sale?
- Consistency
- Business entity
- Materiality
- Going concern
Show answer
Going concern. Cost less depreciation assumes the business will continue to use the assets.
- Explain why the consistency concept matters to the owner of a business.
Show answer
If the same methods are used each year, the profits of different years can be compared fairly, so the owner can see whether performance has really improved.. Say what consistency means and why it helps comparison.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.