Thursday, February 1, 2018

Introduction to Accounting Concepts

Accounting is a system or procedure of keeping financial records of a company by summarising, analysing, verifying and reporting the results of the entity. 

Accounting Concepts


What Are Accounting Concepts?

Accounting is the financial or the prime business language of a professional identity and therefore, it needs accounting concepts to communicate the right financial information. The fundamental Accounting Concepts are needed to communicate with seekers of financial information like its readers or people who need accounting information, or numbers for business computation. 


What Is Relevance of Accounting?

Accounting  information is based on the analysis of the financial statements and information of the business and is thus relevant to the decision making of the entity. The information must be presented and evaluated in a way that the accounting statements help in creating:
a) Predictive value (enable the business to predict future trends of the business)
b) Confirmatory value (enable the business to confirm or correct all important past predictions made by the company) 
c) It should also enable the entity to correctly and accurately estimate the future forecasts based on confirmatory value or past predictions.  


Different Types of Accounting Concepts

  1. Entity- accounting is done for a professional organisation and not any individual/owner of the company.
  2. Financial Measurement- accounting is done for a specific period to measure the financial performance.
  3. Going Concern- accounting is based on the presumption that the business will continue indefinitely.
  4. Cost- all assets are a cost to the company and have a depreciating value attached to it.
  5. Dual Concept- Credit is what comes in and Debit is what goes out. In addition, assets are what the company owns and Liabilities are what the company owes to the creditors. Equity is the difference between the two. Dual Concept is assets = Liabilities + Equity. 
  6. Objectivity- accounting is done only on the basis of financial evidence such as cost incurred needs an invoice copy.
  7. Conservatism- accounting identifies revenue reasonably and never overstates the profits of the company.
  8. Realization- revenues are only recorded once they are realised. 
  9. Matching- to avoid an overstatement, the revenues and expenses incurred in the same period must be recorded together only.
  10. Consistency- only same accounting methods and principles must be used every financial year.
  11. Materiality- all useful information, even minutest of details like stationery spends are recorded for accounting purposes.


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