Accounting concepts and the conceptual framework

ZIMSEC A Level · Accounting · Form 5

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Purpose and users

Financial statements give useful information to investors, lenders, suppliers, employees, government (ZIMRA) and the public. Zimbabwe follows International Financial Reporting Standards (IFRS) for companies.

Qualitative characteristics

Fundamental: relevance and faithful representation (complete, neutral, free from error).
Enhancing: comparability, verifiability, timeliness and understandability.

Key concepts

Going concern, accruals (matching), consistency, prudence, materiality, business entity, money measurement, historical cost, realisation (revenue recognised when control passes), duality, and substance over form.

Capital and revenue expenditure

Capital expenditure buys or improves non-current assets (shown in the statement of financial position).
Revenue expenditure is day-to-day running costs (shown in the income statement).

Treating one as the other distorts both profit and assets.

Inflation

Historical cost accounts can mislead in high inflation: assets are understated and profits overstated. Zimbabwean companies have used inflation-adjusted reporting (IAS 29) in hyperinflationary periods.

Exam tip: Questions often give a situation and ask which concept applies – explain the concept, then apply it to the facts.

Check yourself

Which concept requires that expenses be matched with the revenue they help earn?
Is the cost of installing a new machine capital or revenue expenditure?
Give one effect of high inflation on historical cost accounts.

Show answers

The accruals (matching) concept.
Capital expenditure (it is part of the cost of bringing the asset into use).
Non-current assets are understated / profits are overstated / comparisons over time are distorted.

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