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9 Important Accounting Concepts Notes with PDF

Accounting principles give organisations a standardised framework for keeping track of financial transactions, allowing them to produce accurate information quickly. A more accurate depiction of a company’s financial situation is provided by the accrual concept, which recognises revenues and costs as they are generated or spent. Because accurate financial reporting gives stakeholders a comprehensive picture of a company’s profitability and financial health, it facilitates effective decision-making.

  1. The auditors of a company are required to be employed by a different company so that there is independence.
  2. For example, goods purchased for $5,000, paid electricity bills of $300, goods sold for $6,000 on credit, etc.
  3. Hence, as per the money measurement concept, transactions that can be expressed in terms of money should be recorded in books of accounts.

There also does not have to be a correlation between when cash is collected and when revenue is recognized. Even though the customer has not yet paid cash, there is a reasonable expectation that the customer will pay in the future. Since the company has provided the service, it would recognize the revenue as earned, even though cash has yet to be collected. The accountants use this concept when there is a significant concern regarding the liquidation of the assets. The going concern concept is applied when the chances are high that the company would be liquidated in the next two or four quarters. When a transaction is noted two times on the opposite sides of the same balance sheet, it makes it incredibly easy to check whether the transactions recorded in the balance sheets are correct or wrong.

What is the materiality concept?

It is always important for business accountants and owners to clearly understand the basic accounting concepts. Such understanding helps in integrating uniformity and consistency within the business accounting processes. A public company’s income statement is an example of financial accounting. The company must follow specific guidance on what transactions to record. In addition, the format of the report is stipulated by governing bodies.

Substance Reporting

So it justifies the financial statements as a part of a continuous series of statements. The current statements are tentative and only reflect the financial position of that particular period of time. The going concern concept assumes that a business will continue to operate indefinitely. So it assumes that for the foreseeable future the business will not be winding up.

This will help the accountant identify the business transactions from the personal ones. All forms of business organizations (proprietorship, partnership, company, AOP, etc) must follow this assumption. Accounting principles are the rules that have emerged from the use of basic accounting concepts. These rules have evolved over a long period of time; they represent the collective wisdom of accounting history.

“Assets” here stands for cash, account receivables, inventory, etc., that a company possesses. Consistency prescribes the use of the same accounting principles from one period of an accounting cycle to the next, so that the same standards are applied to calculate profit and loss. The Going concept in accounting states that a business activities will be carried by any firm for an unlimited duration This simply means that every business has continuity of life. This is an important assumption of accounting as it provides a base for representing the asset value in the balance sheet.

Consistency across entities means that it should be possible to compare one business’s performance with a competitor and therefore make informed investment decisions. Consistency is a straightforward principle and is intended to enhance financial reporting by making it easier for users to make comparisons. In that sense it contributes to the achievement of comparability which is explain the various accounting concepts one of the qualitative characteristics of useful financial information (see the related article ‘Qualitative accounting characteristics’). Some accounting software is considered better for small businesses such as QuickBooks, Quicken, FreshBooks, Xero, SlickPie, or Sage 50. Larger companies often have much more complex solutions to integrate with their specific reporting needs.

Therefore, it helps in making educated decisions at precise time intervals. The accounting concept is known to be a process that helps in preparing and recording the financial transactions in an organisation, along with organising the bookkeeping processes. On the other hand, accounting conventions are known to be such principles that act as restrictions regarding organisational transactions that are unclear or complicated.

How Financial Accounting Works

Financial accounting is intended to provide financial information on a company’s operating performance. Financial accounting is the widely accepted method of preparing financial results for external use. The entire purpose of financial accounting is to prepare financial statements, which are used by a variety of groups and often required as part of agreements with the preparing company.

Accounting Concepts

The revenue is recognised in December when the service is delivered, regardless of the actual cash received. The prudence concept promotes a cautious approach to financial reporting. This approach aids firms in risk management by recognising possible losses immediately but only recognising rewards when they are realised. Setting up provisions for possible bad debts based on past trends, for example, demonstrates a responsible approach to risk management. Small businesses hire accountants to advise them on their financial situation and help file taxes.

According to the business entity concept, Rs.1,00,000 will be assumed by a business as capital i.e. a liability of the business towards the owner of the business. In simple terms this means that, for FA2, assets and liabilities will continue to be recorded at the value at which they were initially recorded and that value will be based on the value at the date of the transaction. For example, we can see this in practice in the published financial statements of large businesses. While the exact values to the single dollar are not communicated, the essential (material) information is provided as an aid to decision making. Although the definition might seem a little complicated at first reading, this is essentially a simple idea.

Accounting Conventions

These guidelines dictate how a company translates its operations into a series of widely accepted and standardized financial reports. Financial accounting plays a critical part in keeping companies responsible for their performance and transparent regarding their operations. The key difference between financial and managerial accounting is that financial accounting provides information to external parties, while managerial accounting helps managers within the organization make decisions. Managerial accounting assesses financial performance and hopes to drive smarter decision-making through internal reports that analyze operations. Financial accounting is dictated by five general, overarching principles that guide companies in how to prepare their financial statements.

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