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Accruals concept is the concept that attempt to correctly match all the accounting expenses
(cost) to the income (revenues) to the year at which it occurs at that accounting period,
thus referred to as accrued expenses. Whilst a going concern is an assumption that every
business will continue in operation for the anticipated future, thus is a going concern for
several years, unless if there is evidence i.e. owner acknowledgement. In the Introduction
to Accounting Book by Marriott, Edwards& Mellett 3rd Edition it states, "The going
concern concept assumes that the business is a permanent venture and will not wound up
in the foreseeable future"“
However, problems might arise in companies applying the two concepts, accruals and the
going concern. Firstly looking at the accruals concept, "Under the accruals concept,
revenue and costs are credited or charged to the profit and loss account for the year in
which they are earned or incurred, not when any cash is received or paid"“
(http://www.tutor2u.net/newsmanager/templates/?a=1373&z=82 ) . Therefore this
manipulates the accounting statement in way that income shown is not what the business
received and then the concept attempts to spread the cost. Thus the concept provides a
false picture as to what cash reserves are available within the business, which could result
in serious cash flow problems. For instance, the income ledger may show thousands of
dollars in sales, while in reality the bank account is empty because debtors havent paid you
yet, therefore the problems will arise when the debtors finds it hard to pay off the credit, or
they might delay with their payment due to unforeseen factors this will then affect the
company working capital, which is the amount the business have for day to day expenses.
Thus, the profit indicated in the profit and loss account or the balance sheet is unrealistic,
in short terms this reflects a false picture on the actual business performance at the end of
the accounting period i.e. yearly.
The main purpose of recording the business transactions, so called financial accounting is
defined clearly in the Introduction to Accounting Book by Andrew Thomas 5th Edition:
"Financial Accounting is the process of designing and operating an information system for
collecting, measuring and recording an enterprise transactions and summarizing and
communicating the results of the transactions to the users."“ The part I want to draw
attention on the definition is *ƒ²*ƒ"€š?communicating to the users, thus if there is a false
