Accounting Concepts Definitions Part : 2 ( The Relevance Concept )

accounting concepts

3. The Relevance Concept

Accounting concepts have different alleys. You have already been introduced to the first two and now time to dive deep. [Remember that the topic (Accounting concepts) in discussion here is not merely one concept or, a collection of some and solely so. But, it is based on something different. Here you will get to know some relevant basics, some bits of information on standards and also the principles. Keep in mind that even if these don’t match to the textbook you follow, they are nowhere near wrong. So, now we will start on the relevance concept.

What Is It? :

It is based entirely on the premises of accounting period and also the methods one entity will follow. Whenever you watch that in an account something is included and some are appearing in the notes section you may ask yourself why so? I will not go to the answer straight forward rather I will give you several examples and then arrive to the answer.

 EXAMPLES:

                     CASE 1

                      XYZ co. reported the annual revenues and expenses as stated below:

Sales       $50000

COGS       $20000

Operating expenses   $13000

Administrative expenses $5000

Income from operating activities $2000

The BOD of XYZ co. came to know the following after a meeting:

  • Income has $500 which was accrued during the previous year,
  • Income amount includes $200 which is advance income,
  • An income of $100 was due but, not received,
  • Administrative expenses have $ 600 which is due from previous year and $ 100 of this year’s expense is due to date,

DECISION MAKING:

As all the additional information are related to income and expenses we focus centrally on them. Now,

Þ    Any previous year’s amount will be excluded from this year’s balances and if possible will be added to the previous year’s balance sheet,

Þ    Any amount related to  this year’s accrual then it will be added to this year’s balance,

Þ    Any amount related to next year will be excluded from this year’s balances and will appear in this year’s balance sheet.

                           CASE 2

A company in an industry wants to disclose a method for their asset. The industry follows double declining method. What should the company do now?

DECISION MAKING:

Company should follow the industry standard.

                                       CASE 3

A business has other units and they have separate methods to record their revenues and expenses, the business wants to show all of them together now. Can they do that?

DECISION MAKING:

                                           No, as long as all the units are not interlaced or, amalgamated; they can’t do anything of this kind.

                                       CASE 4

A business is fighting a case of $50000 and wants to show that as a liability in their balance sheet, can they do that?

DECISION MAKING:

Such a thing can be described as liability but, that is of contingent nature and so it will be recorded but, not in actual balance sheet rather, in the notes section to that.

The least to say, any amount that is relevant in nature to the ongoing accounting period’s methods and time period should be included and any amount which is not relevant to this stature will be excluded. That means,

“Any amount which is recognized by the standards to be included in the going period’s records (If available) should be included and any amount deemed the opposite will be excluded. This is the relevance concept.”                    

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