Page 31 - Accountancy_F5

Business or separate entity and services are consumed in generating
A business entity is treated as a separate income rather than when actual cash is
entity from its owners. From accounting paid to suppliers. Matching and realisation
point of view, whatever the legal position concepts are closely related with accrual
or form, any business, whether a company basis of accounting, as explained in the
or sole trade, qualifies to be called business following concepts:
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entity. Therefore, the books of accounts of Matching concept
any type of business are expected to reflect According to the matching concept, the
this viewpoint, that is, as accountant you revenue earned and the expenses incurred
should refrain from mixing the affairs of must belong to the same accounting period.
business with those of its owners. When So once the revenue is realised and e
LANGUAGE EDITINGxpenses
recording business transactions, one should incurred, the next step is to allocate and
not incorporate personal transactions and match up the two to the same accounting
activities of the owner.
period. According to this concept, revenue
For example, if the owner buys a new pair should be recognised/ recorded in financial
of Khanga, trousers or shoes for personal records and matched against expenses to
use, it is incorrect to record this in the determine profit in the financial statements,
business’ financial records as business when earned rather than when cash is
expenses. The importance of business entity collected. This can be done with the help
includes, ability to measure properly the of accrual concept already explained.
performance and financial position of the Realisation concept

business as well as determining taxable The term realisation means the creation of
income of the business. Without observing legal right to receive money. This concept
the business entity principle, the business is derived from the principle of recogniz-
transactions and owners’ personal revenue/ ing revenue. According to this principle,
expenses may be mixed up thus making it
difficult to achieve the stated objectives. revenue from the sale of goods/services
can only be recognised when such goods/
Accrual basis of accounting services are delivered/ rendered to the
Accrual basis of accounting is the most customer. It is at this point that, revenue
important concept in accounting that can be recorded in the financial records of
governs the timing in recording of revenue
and expenses. Revenue is recognised or a business.
recorded as being earned when the goods Going concern
or services have been delivered to the Financial statements are prepared by
clients rather than when cash is collected. assuming that, the business will continue
Expenses are supposed to be recognised to operate for the foreseeable future unless
or recorded as being incurred when goods there is an evidence which indicates

Student’s Book Form Five
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ACCOUNTANCY_DUMMY_23 JUNE.indd 18 23/06/2024 17:34