For example, the cost of sales amount represents the total amount of cost that was incurred or during the same accounting period as when the sales output was made. The purpose is to ensure that the gross profit and the net profit are generated from deducting the same period costs and expenses to the same period revenues (Dyson, 2010).
Relevance concept states that all data gathered and presented must be relevant to the decision making process (Noreen, 2008). If the manager plans to set up a branch in Scotland, the manager needs relevant data from Scotland, not from China (Dyson, 2010). Additionally, the raw materials information is relevant to the management’s decision as to replacing the current raw materials with higher quality raw materials (Weetman, 2006). The move is set to increase the customers’ demand for the company’s products and services.
Reliability concept states that some misstatements of the company’s financial report accounts may reduce the readers’ reliability on the financial reports (Dyson, 2010). For a report to be reliable or trustworthy, companies are required to have an independent or external auditor submit a report as the trueness of the financial reports presented to interested parties (Verzuh, 2005).
On the other hand, the amount paid is recorded as a debit to taxes or licenses or business permits. The company will also record the credit to cash for the year 2012. Consequently, the amount paid increases the expenses shown in the income statement. Similarly, the balance sheet will show a deduction amounting to £4,800 and another £4,800 for the entire 2012 annual accounting period ending December 31 2007 (Drury, 2006).
The company should record a debit to accounts receivable. The account title represents the amount that the customer promises to pay at an agreed future time.