Accrual Concept Paper

1750 Words 7 Pages
Question 2
a) Accrual and Prudence
Firstly, one of the accounting concepts is accrual concept. According to defined accrual concept is recognizes the time lag between sales and purchases on one hand, and collection and payment of cash on the other (, 2014). Accruals Concept of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. An exception to this general rule is the cash flow statement whose main purpose is to present the cash flow effects of transaction during an accounting period. Under cash-basis accounting, revenue is recorded when cash is received, and an expenses is recorded when cash is paid. The cash basis often leads to
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According to this concept, the method is normally used by the entities engaged in the retail business with large number of items in inventory having similar margins. The cost of inventory will be determined by deducting the margin from the selling price of such inventory items. The cost of items of inventory that are not ordinarily interchangeable or different in nature and the goods which are produced for a specified project will be determined by specific identification of their individual cost incurred on such items. The cost of items of inventory that are ordinarily interchangeable or similar in nature can be determined by using first-in, first-out (FIFO) method and weighted average cost method. One of the assumptions in consistency concept is method of valuing the cost of goods sold and inventory from FIFO to LIFO. FIFO means first in, first out method. Assumes that the earliest goods are purchased are the first to be sold. In addition, LIFO means last-in, first out which assumes that the latest goods purchased are the first to be sold. For instance, an electronic retailer, named Bow Valley Electronics has used FIFO method to measure the value of inventory for a long time period. In the current years, bow valley electronic gain more profitable and the accountant of Bow Valley Electronic had suggested that they could change from FIFO method to LIFO method in order …show more content…, (2014). Accrual concept in preparing financial statements explained. [online] Available at: [Accessed 2 Dec. 2014].
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