Edexcel International A Level Accounting: Role and purpose, concepts and conventions (YAC11) – Revision Notes

These notes condense outcomes 1.1.1 to 1.1.2 and 1.1.8 to 1.1.10 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018. This is Unit 1 content, so it is International AS material that also counts towards the full International A Level. All money amounts are in dollars.

For full explanations use the study guide. Then try the practice questions. Wider topic: principles and double entry study guide and principles revision notes. Course hub: Edexcel A-Level Accounting. Checklist: YAC11 topic checklist. Check your gaps with a free 10-minute diagnostic.

Role and purpose (1.1.1 and 1.1.2)

Role: record, analyse, communicate information to users.

Step	What happens	Example output
Record	Transactions entered in the books of account in money terms	Ledger accounts
Analyse	Totals, comparisons, percentages	Gross profit as a percentage of revenue
Communicate	Presented to users	Financial statements, reports

Users and what they want.

User	Wants to know
Owner	Profit, drawings, value of the business
Managers	Costs, margins, performance by product
Lender	Ability to repay loan and interest
Supplier	Likelihood of being paid on time
Employees	Security and stability
Tax authority	Taxable profit
Investor	Return compared with alternatives

Purpose: an aid to management. Five uses, each needing a figure to back it up.

Use	Short example
Planning	Set next year’s sales target from this year’s results
Controlling	Compare actual costs with expected costs
Decision making	Decide whether to add a product line
Assessing performance	Compare margins between months
Safeguarding assets	Reconcile inventory records with a count

Small worked reminder. Gresham Toys: revenue 90,000, cost of sales 54,000. Gross profit = 90,000 - 54,000 = 36,000. Gross profit as a percentage of revenue = 36,000 / 90,000 = 40.0%. If last year’s figure was 44%, the manager asks why the margin has fallen.

The nine concepts and conventions (1.1.8 and 1.1.9)

Concept	One-line meaning	Test to run on a scenario	Typical effect
Going concern	Business will continue for the foreseeable future	Is closure planned or likely?	Assets kept at carrying value; costs spread over asset life
Prudence	Do not overstate assets or income, or understate liabilities or expenses	Is there doubt over a gain or loss?	Lower profit or asset value when in doubt
Accruals	Match income and expenses to the period earned or incurred	Does cash move in a different period from the benefit?	Accrued expenses, prepayments
Consistency	Same policies each period	Has a method changed?	Results stay comparable
Historic cost	Record assets at price paid	Is a current value being used instead?	Assets stay at cost
Materiality	Matters only if it could change a user’s decision	Is the item big enough to matter?	Small items expensed
Money measurement	Only items measurable in money are recorded	Can a reliable money amount be given?	Skills, reputation not recorded
Realisation	Revenue is recognised on supply of goods or services	Has the customer received the goods or service?	Deposits are liabilities until then
Business entity	Owner and business are separate	Is this a business or a personal item?	Personal use is drawings

Pairs people mix up.

Pair	Difference
Accruals and realisation	Accruals matches costs and income to the right period; realisation fixes the point at which revenue is earned
Prudence and understating	Prudence stops overstatement; it does not allow deliberate understatement
Historic cost and money measurement	Historic cost is about which value to use for an asset; money measurement is about what can be recorded at all
Consistency and comparability	Consistency is one business over time; IAS support comparison between businesses
Going concern and prudence	Going concern is the basis for the whole set of statements; prudence guides individual judgements

Method in steps: naming a concept in an exam answer

1. Quote or paraphrase the key fact in the scenario.
2. Name the concept exactly as the specification does.
3. State what it requires, in one clause.
4. State the effect on a figure: profit, an asset, a liability or comparability.

Example: “Pendry Tools values 30 damaged units at 7 instead of cost 8. This is prudence, which stops assets being overstated, so inventory falls from 240 to 210 and profit falls by 30.”

Small worked reminders

Accruals. Rent of 6,000 for a year is paid on 1 October and the year ends on 31 December. Monthly rent = 6,000 / 12 = 500. Three months used = 1,500, which is the expense. The remainder, 6,000 - 1,500 = 4,500, is a prepayment (other receivables).

Prudence. 30 units cost 8 each (240). Selling price is 12 and selling costs are 5, so net realisable value (NRV) = 12 - 5 = 7. Value at the lower of cost and NRV = 30 x 7 = 210. Profit is reduced by 240 - 210 = 30.

Materiality. An item of 25 against revenue of 300,000 is 25 / 300,000 = 0.0083% of revenue, so it is treated as an expense.

Realisation. A deposit of 500 received for goods to be delivered next month is not revenue yet. It is a liability until delivery.

Business entity. The owner takes goods for personal use: debit drawings, credit purchases. The business expense is not increased.

Which figure does each concept change?

Concept	Figure usually affected
Going concern	Asset values if trading will stop, and depreciation periods
Prudence	Inventory, receivables, provisions, profit
Accruals	Expenses, other payables, other receivables, profit
Consistency	Comparability of profit from year to year
Historic cost	Non-current assets and capital employed
Materiality	Whether an item is capitalised or expensed
Money measurement	What is left out of the statements
Realisation	Revenue and trade receivables in the right period
Business entity	Drawings and capital

Use this table as a prompt when an exam question asks what a concept does to a figure, not only what it means.

International Accounting Standards (1.1.10)

IAS are agreed rules on recognising, measuring and presenting transactions. Benefits: comparability between businesses, trust in the statements, and less room to flatter the figures. Two standards linked to this topic: IAS 2 (inventories, lower of cost and NRV) and IAS 7 (statement of cash flows, met in Unit 2).

Use this (IAS term)	Not this
Statement of financial position	Balance sheet
Statement of profit or loss	Trading and profit and loss account
Revenue	Sales
Inventory	Stock
Trade receivables	Debtors
Trade payables	Creditors
Non-current assets	Fixed assets
Carrying value	Net book value
Irrecoverable debts	Bad debts
Allowance for irrecoverable debts	Provision for doubtful debts
Inventory count	Stock take
Other payables	Accruals

Quick self-test

1. Name the three parts of the role of accounting.
2. Pendry Tools holds 30 units at cost 8 each. They can be sold for 12 each with selling costs of 5 each. Calculate the inventory value and the effect on profit.
3. Rent of 6,000 for twelve months is paid on 1 October. The year end is 31 December. State the expense and the prepayment.
4. The owner pays a personal holiday from the business bank account. Which concept explains why it is not an expense?
5. A customer pays a deposit of 500 for goods to be delivered next month. How is it treated at the year end, and which concept applies?
6. Land cost 90,000 and is now worth 140,000. Which concept keeps it at 90,000?
7. Calculate 25 as a percentage of revenue of 300,000 and name the concept used to expense it.
8. Give the IAS term for debtors and for net book value.
9. State two benefits to a lender of businesses using IAS.
10. Name the concept that justifies spreading the cost of a machine over several years.
11. Gresham Toys used electricity worth 210 in December. The bill arrives in January. State the treatment and the effect on profit.

Answers

1. Record, analyse and communicate.
2. NRV = 12 - 5 = 7. Value = 30 x 7 = 210 (cost is 240). Profit falls by 30.
3. Expense 1,500 (3 months at 500); prepayment 4,500.
4. Business entity. It is drawings.
5. A liability at the year end; revenue is recognised on delivery. Realisation.
6. Historic cost.
7. about 0.0083%. Materiality.
8. Trade receivables; carrying value.
9. For example: statements can be compared with other businesses, and they follow recognised rules.
10. Going concern (with accruals matching the cost to the periods that benefit).
11. Accrue it: a current liability (other payables) of 210, and profit is reduced by 210.

Where marks are usually lost

• Writing only “records transactions” for the role of accounting.
• Listing users without saying what each one needs.
• Naming a concept but not the effect on profit or an asset.
• Treating prudence as permission to understate profit.
• Mixing up accruals (which period) with realisation (when revenue is earned).
• Treating a deposit as revenue.
• Giving a market value when historic cost is asked.
• Using older terms such as stock, debtors, balance sheet and net book value.
• Calculating a prepayment from the wrong number of months.

Frequently asked questions

What is the going concern concept? Going concern assumes the business will continue trading for the foreseeable future, so assets are kept at their carrying value. If the business plans to close, a going concern basis is no longer suitable and assets may need to be valued at what they would sell for.

What is the business entity concept? The owner and the business are treated as two separate parties, and the business books record business dealings only. Goods taken by the owner for personal use are drawings, not an expense, so profit is unaffected but capital falls.

What does the money measurement concept mean? Only items that can be expressed in money are recorded in the accounts. Things such as staff skill, customer loyalty or reputation are left out because no reliable amount can be placed on them.

What are the five purposes of accounting information for managers? Managers use accounting information for planning, controlling, decision making, assessing performance and safeguarding assets. Good answers tie each purpose to a real figure in the scenario.

Why does the consistency concept matter? Using the same accounting policies from period to period lets results be compared. A change of policy is allowed for good reason, but its effect must be disclosed, because a change such as switching from FIFO to LIFO can alter profit with no change in trading.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018, published by Pearson Education Limited.