Chapter 3 •Financial statements and their interpretationl the amount (value) of the revenue is capable of being measured with substantial
accuracy;
l the necessary work to earn the revenue has substantially been completed; and
l it is reasonably certain that the cash will be received.
This is usually taken to be the point in time at which the customer takes delivery of,
and accepts, the goods or service. Thus recognition of the revenue and receipt of the
cash do not occur at the same point, except in the case of cash sales. Outside the retail
trade, cash sales are rare. Thus, for most businesses, cash receipts from sales revenues
tend to lag behind recognition of sales revenues.Matching convention
Expenses (trading events leading to reductions in wealth) are matched to the particu-
lar revenues that they helped to generate in the same accounting period. For example,
where the sale of some goods is recognised as a revenue in a particular accounting
period, the cost of acquiring those goods should be treated as an expense of the same
period. This is irrespective of whether the goods were acquired in the current account-
ing period or in an earlier one.
The objective that the matching convention pursues is to assess the net effect on
wealth that the revenues of a particular period generate.Accruals convention
Profit or loss is concerned with net increases or decreases in wealth, not with increases
or decreases in cash. Thus when deriving the amount of the expenses that are to be
matched to particular revenues, the fact that cash may not yet have been paid is
not relevant. For example, the cost of inventories sold, for inclusion in the income
statement, will be the same, irrespective of whether or not payment for the inventories
concerned has yet been made.Prudence convention
Accounting should err on the side of caution. For example, if an item of inventories
has a sales value that is below cost, this should be reflected by reducing its value in the
balance sheet to the lower figure, with the same reflection of the loss of wealth being
shown in the income statement. Following the same philosophy, a gain in the value
of an asset is not taken into account until it is realised as a result of a disposal of
the asset concerned to some person or organisation outside the business. In this way
the prudence convention tends to underpin both the historic cost and the realisation
conventions.
It has been argued that adherence to the prudence convention tends to lead to
a fairly consistent bias in accounting information, which could mislead a reader of
financial statements.Going concern convention
In the absence of evidence to the contrary, it is assumed that the business will continue
indefinitely. This means, for example, that it will be assumed that a non-current assetOpenmirrors.com