Answer to Question #199195 in Accounting for Ziyanda Ngese

Question

How would you present and explain the following fundamental accounting concepts to the Grade 10 Accounting learners in your class? (12) a) Cost principle b) Materiality principle c) Going principle (20) HINTS: Aspects you may consider: 1. Define the concepts. 2. Provide and explain an example of each concept. 3. Consult your study guide and CAPS document. (10)

Answer 1

Solution:

a.). Cost principle – This is the concept that a company should only record its assets, liabilities, and equity investments at their original purchase costs rather than their fair market value. You should always use the historical cost of an item in the books and not their current fair market value.

For example, if you own some property which you purchased at $20,000, but its current market value is currently $30,000, you should only use its original purchase cost of $20,000 and not its current market value of $30,000 when you record in your books of accounts.

 

b.). Materiality principle – This is the concept that you should record a transaction in the accounting records, failure to which it may alter the decision-making process of users reading the company’s financial statements. It relates to the significance of transactions, balances, and errors contained in the financial statements. It defines the threshold or cut-off point after which financial information becomes significant to the decision-making requirements of the users. Therefore, the information contained in the financial statements must be complete in all material respects in order to present a true and fair view of the affairs of the company. Materiality is relative to the size and particular circumstances of individual companies.

 

For example, a default by a customer who owes only $1000 to a company having net assets worth $10 million is immaterial to the financial statements of the company.

However, if the amount of default was, say, $2 million, the information would have been material to the omission of the financial statement of which could cause users to make incorrect business decisions.

 

 

c.). Going principle – This is the concept that the company will remain in operations for the foreseeable future and will not liquidate or be forced to discontinue operations due to any reason which is not justified. This means that you would be justified in deferring the recognition of some expenses such as depreciation until a later period. A company is a going concern if no evidence is available to believe that it will have to cease its operations in the foreseeable future.

 

An example of the going concern concept of accounting is the computation of depreciation on the basis of the expected economic life of fixed assets rather than their current market value. Firms assume that their business will continue for an indefinite period of time and the assets will be used in the business until fully depreciated. Companies also accrue and prepay expenses since they believe that they will continue operations in the future.