Ratio analysis and the applications - Essay Example

The first one is that valuation must be done in a prudent way. This means that when valuing assets on should make sound decisions in order to value the assets in question correctly the second principle states that; profits that are made in the balance sheet are the only profits that should be included in financial statements. The third principle stipulates that depreciation should be considered when reporting for a financial year regardless of whether it causes a gain or a loss. An example of where the prudence concept is normally used in accounting is when calculating profit or loss.

For example, some liabilities are based on the possibility of an event occurring in the future and is expected to generate a profit or loss. If the likeliness of it happening is more than 50% it should be recorded depending on whether it results in a profit or loss. An example of such an event is a law suit. b) The Matching Concept This is a principle in accounting that stipulates that charges and incomes which relate to a financial year must be recorded regardless of the date when the payment of the charges or income was receipted.

According to (Hoque, 2006), it is the accounting approach of allocating expenses to their respective incomes. The matching principle of accounting is governed by a number of principles. . This means that account policies adapted by a business organization should follow a particular principle. This concept aims at allowing comparability of the business organizations’ financial positions and the results of their business activities. The concept puts forward the standardization of financial statements in terms of recording and valuation.

An example is when a business institution is calculating depreciation on its assets, for example, a staff van. If the company chooses to use a method in calculating depreciation of the van for instance, the strait line method; it should stick with the method when calculating future depreciation of the van and other assets. This will help in comparing the depreciation of the van and other assets. d) The going concern concept. This is a concept that stipulates that any business establishment is expected to grow in its corporate life irrespective of the shareholders or owners lifespan.

The going concern concept is the main idea behind the costing concepts. However, it is important to note that the going concern should be explained at the end of very financial statement if it has been deemed invalid. A business establishment is regarded as a going concern when there is no intention to wind up the business. An example of where this concept is used is when a business institution acquires an asset, in the profit and loss account the asset is not recorded at its present market value.

However, it is recorded minus its depreciation since it will be used for a long period of time. e) The Concept of Double Entry This is a concept in book keeping which stipulates that all changes in accounting information must reflect in at least two ledger