Jonathan: The definitive Accounting Principles

[Troy Steadman]

There doesn't seem to be any google on this so perhaps (late on Sat
night) I can start off a thread leading to the ukba agreed definitive:

1) "Accruals" aka "Matching" - Expenditure should be matched to the
Sales to which it contibuted.
2) "Substance over Form" - what is Actual should supercede the Legally
Correct
3) "Consistency" - What we did last year has to be comparable with what
we are doing this year - to some extent right or wrong - if the figures
are to be comparable.
4) "Going Concern" - regardless of how profitable a business is can it
survive?
5) "Materiality" - anything unimportant need not be shown.

"Prudence" is nowadays superceded. We should aim for Precision?

 

[Snuggles]

There doesn't seem to be any google on this so perhaps (late on Sat
night) I can start off a thread leading to the ukba agreed definitive:

Argh!! Re-living Thursday's CIMA intermediate Finance paper.

Thanks for that!

Snuggles

 

[Ronald Raygun]

"Prudence" is nowadays superceded. We should aim for Precision?

I think you mean accuracy, and we should attain it, not merely
aim for it.

3.142592 is more precise than 3.1416, but the latter is a more
accurate representation of pi.

Accurate spelling is also a good idea, so I recommend "superseded".

 

[Troy Steadman]

I think you mean accuracy, and we should attain it, not merely
aim for it.

Precision is accuracy adjusted for context.

3.142592 is more precise than 3.1416, but the latter is a more
accurate representation of pi.

I disagree. Both are inaccurate but 3.14 is precise enough in my
circles

Accurate spelling is also a good idea, so I recommend "superseded".

Okay. Last year they took a Prudent view of WIP. This year we are going
to be accurate. Lo and behold we are far more profitable this year than
we were last year, and it just so happen I'm meeting the bank manager
on Monday.

 

[Ronald Raygun]

Precision is accuracy adjusted for context.

That's not how I would have put it, but I agree if you mean
essentially what I say in my last paragraph below.

I disagree. Both are inaccurate but 3.14 is precise enough in my
circles

I'm not sure you've yet grasped the difference in meanings.

Precision is a measure of how close it is *possible to get*,
within the constraints of representation, to the value you're
trying to represent. Accuracy is a measure of how close to the
value you *actually are*, bearing in mind the precision available.

3.14 is not very precise, but it is as accurate as it's possible
to get with two places after the decimal. The true value is less
than 0.005 away. 3.142592 is 10,000 times as precise, but it is
very far off being as accurate as posisble to 6 places because the
most accurate representation at that precision is 3.141593, so the
true value is not at all less than 0.0000005 away, but about 2000
times as much. The high precision gives a false sense of accuracy.

Figures presented in a Profit & Loss Account and Balance Sheet are
not often to penny precision, are very often to pound precision,
and for large entities can be to precisions of thousands or
millions of pounds. In all cases, though, they are expected to
be completely accurate within the constraints of their precision.

 

[Peter Saxton]

That's not how I would have put it, but I agree if you mean
essentially what I say in my last paragraph below.


I'm not sure you've yet grasped the difference in meanings.

Precision is a measure of how close it is *possible to get*,
within the constraints of representation, to the value you're
trying to represent. Accuracy is a measure of how close to the
value you *actually are*, bearing in mind the precision available.

3.14 is not very precise, but it is as accurate as it's possible
to get with two places after the decimal. The true value is less
than 0.005 away. 3.142592 is 10,000 times as precise, but it is
very far off being as accurate as posisble to 6 places because the
most accurate representation at that precision is 3.141593, so the
true value is not at all less than 0.0000005 away, but about 2000
times as much. The high precision gives a false sense of accuracy.

Figures presented in a Profit & Loss Account and Balance Sheet are
not often to penny precision, are very often to pound precision,
and for large entities can be to precisions of thousands or
millions of pounds. In all cases, though, they are expected to
be completely accurate within the constraints of their precision.

When I was involved in big company audits your last sentence didn't
apply. Say the accounts were presented to the nearest million pounds,
it may be decided that only adjustments over 10 million pounds would
be made after ten days to go to signing, after five days it may only
be 20 million pounds. It's such a long time ago I can't remember the
figures but it was that kind of theory.

 

[Troy Steadman]

That's not how I would have put it, but I agree if you mean
essentially what I say in my last paragraph below.


I'm not sure you've yet grasped the difference in meanings.

It may be that chatting over the fence with your Lallans neighbours has
made it impossible for you to receive Oddle Poddle.

Precision is a measure of how close it is *possible to get*,
within the constraints of representation, to the value you're
trying to represent.

Not in the sense I am using it. "Precision" is a measure of how close
you *want* to get. As Peter has pointed out below being accurate is not
always desirable. If you find an error during an audit it is not normal
or desirable to correct that error. Only if the accumulation of all
errors has created a material error - one that would mislead a user of
the accounts - would you (generally speaking) put through a journal.

Accuracy is a measure of how close to the
value you *actually are*, bearing in mind the precision available.

3.14 is not very precise, but it is as accurate as it's possible
to get with two places after the decimal. The true value is less
than 0.005 away. 3.142592 is 10,000 times as precise, but it is
very far off being as accurate as posisble to 6 places because the
most accurate representation at that precision is 3.141593, so the
true value is not at all less than 0.0000005 away, but about 2000
times as much. The high precision gives a false sense of accuracy.

Figures presented in a Profit & Loss Account and Balance Sheet are
not often to penny precision, are very often to pound precision,
and for large entities can be to precisions of thousands or
millions of pounds. In all cases, though, they are expected to
be completely accurate within the constraints of their precision.

That should be "reasonably precise within the constraints of their
materiality".

 

[Troy Steadman]

It may be that chatting over the fence with your Lallans neighbours has
made it impossible for you to receive Oddle Poddle.


Not in the sense I am using it. "Precision" is a measure of how close
you *want* to get. As Peter has pointed out below being accurate is not
always desirable. If you find an error during an audit it is not normal
or desirable to correct that error. Only if the accumulation of all
errors has created a material error - one that would mislead a user of
the accounts - would you (generally speaking) put through a journal.


That should be "reasonably precise within the constraints of their
materiality".

Also Ronald I'm not talking about "precision" in areas such as the cost
of a stamp.

Say in your client's warehouse, one third of the closing stock was
there as opening stock? "Prudence" might sensibly suggest writing it
off because there is a good chance they are never going to get rid of
it. "Accuracy" might suggest valuing it at the lower of cost or NRV.

 

[DoobieDo]

It's such a long time ago I can't remember

<nods />

 

[DoobieDo]

Troll Steadman wrote:

Say in your client's warehouse, one third of the closing stock was
there as opening stock?

you've got your head so far up your arse you'd never know that the same items
were there from last year, indeed a different "monkey" would attend the
stocktake and if you told said monkey it was a bucket of steam priced at £x
s/he wouldn't know any different.....

they'd go away looking for invoices from suppliers for a bucket, some h2o, and
an heating element.

 

[Troy Steadman]

you've got your head so far up your arse you'd never know that the same items
were there from last year, indeed a different "monkey" would attend the
stocktake and if you told said monkey it was a bucket of steam priced at £x
s/he wouldn't know any different.....

they'd go away looking for invoices from suppliers for a bucket, some h2o, and
an heating element.

[Chuckles heartily]

I'm honoured and impressed that you have think I'm important enough to
to send a "monkey" to attend a stocktake. This is the computer age
Dopey; you can download the Purchases database, compare it with the
Closing Stocks database, and anything that is in the latter and not in
the former has been there a year.

I've never done a sensible audit of things you can "price". Only:

1) 1 million CD's by 1000 different musicians.
2) Light fittings for designer one-offs for Waitrose etc - they run off
a hundred extra as spares but have no idea if or when Waitrose will
ever come back for them.

I defy anyone to price such Stocks except by guesswork.

 

[Jonathan Bryce]

5) "Materiality" - anything unimportant need not be shown.

"Prudence" is nowadays superceded. We should aim for Precision?

No. We should aim for materiality

 

[DoobieDo]

I'm honoured and impressed that you have think I'm important enough to

you have think ? important (roflamo)

you can download the Purchases database, compare it with the
Closing Stocks database, and anything that is in the latter and not in
the former has been there a year.

err .... in approx a £2.5m turnover per annum, employs 25-30 company for
instance?

I've never done a sensible audit of things you can "price". Only:

my theory was confirmed.....

 

[Troy Steadman]

No. We should aim for materiality

Indeed. Yesterday you wrote:

The £250 on-line PAYE incentive is tax free, so what is the correct wayto
extract it from a small Ltd Coy, and xfer it to members? A dividend could
(presumably) get clobbered for NCDT.

What, if anything, should be shown in the accounts, or is it permissible
to exclude it totally?

It wouldn't be permissible to exlude it totally

....but that isn't true. It may not be desirable to exclude it totally,
but if it is not Material it is *permissable* to exlude it totally.

 

[Troy Steadman]

Indeed. Yesterday you wrote:



It wouldn't be permissible to exlude it totally

...but that isn't true. It may not be desirable to exclude it totally,
but if it is not Material it is *permissable* to exlude it totally.

Thinking about this maybe I ought to restate that Accounting Principle:

Not: "Anything unimportant need not be shown"

rather:

"Anything material *must* be shown"

Two ways of saying the same thing, but the latter is right and the
former is wrong.

 

[Ronald Raygun]

Thinking about this maybe I ought to restate that Accounting Principle:

Not: "Anything unimportant need not be shown"

rather:

"Anything material *must* be shown"

Two ways of saying the same thing, but the latter is right and the
former is wrong.

If they're the same thing, then if one is right the other *cannot*
be wrong.

 

[Troy Steadman]

If they're the same thing, then if one is right the other *cannot*
be wrong.

They are not the same thing. They are two different ways of saying the
same thing, so they must differ.

"Anything unimportant need not be shown," suggests slackness and ennui.
"Anything material *must* be shown," implies diligence.

 

[Troy Steadman]

you have think ? important (roflamo)

You've got me with that acronym Dopey. Roll Out February Let's 'Ave
More...?That "English as a Second Language" evening class is doing you
proud!

err .... in approx a £2.5m turnover per annum, employs 25-30 company for
instance?

You got me with that one! I raise your £2.5m and employs 30-50
company.

 

[DoobieDo]

You've got me with that acronym Dopey. Roll Out February Let's 'Ave
More...?That "English as a Second Language" evening class is doing you
proud!

roll on floor laughing my arse off... usenet as any language is obviously not
your strong point.

 

[Troy Steadman]

roll on floor laughing my arse off... usenet as any language is obviously not
your strong point.

Roll On t'Floor Laughing Arse My Off?