When I was a very young girl (aged just 16) starting out in the world of accountancy, I was taught about some basic concepts of accounting – the foundation of all that I now know about accountancy.
These concepts were:
Going concern concept – assumes that the business would continue in ‘operational existence’ for the foreseeable future
Accruals concept – income and costs to be recognised as they were earned or incurred, not as money is received or paid, and matched with one another
Consistency concept – accounting treatments should be applied consistently within accounts and from one year to the next.
Prudence concept – required that revenue and profits were not anticipated
These concepts apply today as they did when I was a girl and are used throughout accountancy.
A History Lesson
This may come up in a quiz some time – so listen very carefully!
Just for the nerdy types amongst you (I too admit that I am one of those) these concepts were documented in what was called a Statement of Standard Accounting Practice – an SSAP. In fact they were in SSAP2 ‘Disclosure of Accounting Policies’.
Now I always remember that because you would think that the basic concepts of the topic that you studied would be in SSAP1 but that was in fact Accounting for the results of associated companies.
SSAP2 was replaced by a FRS – a Financial Reporting Standards but I digress now. But if you do want to read more on this have a look at the ICAEW web site ‘Knowledge guide to UK Accounting Standards’ – click here
Throwing it all away
Why am I telling you this?
The proposed new cash accounting scheme announced by the Government in the March 2012 budget throws away three out of the four of these concepts and has left me feeling that the rug has been pulled from my very foundation of accounting knowledge and learning.
By electing for a system of cash accounting the foundation concept of accruals accounting is cast aside. Transactions will be accounted for when the cash is received. So destroying another concept – that of prudence.
For example if cash is received for a sale before the stock has to be paid for then profits are anticipated and not those actually earned.
Add into this mix the option of being able to change from one system to another each year (yet to be clarified if this will be allowable) then bangs goes the consistency concept.
Of course the Cash Accounting Scheme is only at consultation at the moment and, if introduced, will only apply to a certain number of businesses – estimated at being JUST 3 million!
Hang up my abacus?
Am I now too old to learn new tricks or are there some fundamental flaws with what is being proposed?
I have read the consultation document and by golly it is a can of worms which if followed by an unsuspecting business could easily lead to more tax being paid – more on that another time!
Surely it is the system of taxation that needs to change and not the way that accounting is done?
Are HMRC proposing to change the wrong rules?
In fact having read the consultation document it seems to be that a whole load of news rules are being introduced!
For those of you who would like to read the whole Consultation document it is here:
Don’t worry it is only 34 pages.