Accounting Concept

Financial accounting is the collection, summarization and presentation of the financial information resulting from the conduct of a business enterprise. It informs the company’s stakeholders of its operating earnings and market value. Furthermore, financial accounting is utilised to provide financial transactions in an acceptable and adaptable way to all firms’ stakeholders.

The basic rules, conditions and assumptions that determine the accounting parameters and limitations are accounting concepts. Put another way, the basic accounting concepts are the widely accepted accounting principles used to prepare financial statements in the same format consistently. 

12 Most Important Concepts of Accounting

The Entity Concept

Your business is distinct from you, and the concept of “entity” conveys this. There is a distinct difference between a company’s owner and the company’s owner. The entity is recognised as a legal person under the law. A set of financial statements and records of business transactions must be prepared and kept by the company.

The Money Measurement accounting concept

Only monetary transactions are measured and recorded according to the Money Measurement concept. To put it another way, books of accounts solely record financial transactions.

Periodicity Concept

The notion of periodicity asserts that an organisation or business must keep financial records for a specific period, usually a calendar year. Monthly, quarterly and annually are all options for drawing financial statements. Such accounting concepts aid in determining any changes that have occurred throughout time.

Accrual Concept

The transaction is recorded on a mercantile basis by the basic accounting concepts of accrual accounting. For the period to which the transaction relates, transactions must be recorded as they occur, not as currency is received or paid.

Matching Concept

The Accrual and Periodicity concepts are linked to the matching concept in accounting. An entity must only account for expenditures related to the period in which revenue is considered. This matching concept in accounting indicates that the entity must record revenue and expenses over the same period.

The Concept of “Going Concern”

The going concern accounting period concept assumes that the business will continue to operate on an ongoing basis. As a result, the company’s financial records are set up to last for many years to come.

The Cost Concept

According to the cost concept, an asset’s acquisition cost should be documented as its current market worth rather than its historical cost.

The Realization Concept

In some ways, this term is similar to the accounting concept of cost. An asset should be recorded at a cost under the realisation principle until its realisable value is achieved. When an asset is sold or otherwise disposed of, the company should record the realised value of that asset in its books.

Dual Aspect Concept

The double-entry accounting system is built on this principle. There are two sides to every transaction: debit and credit. An entity has to keep track of every transaction, including the debit and credit components.

Conservatism

An essential part of this conservative philosophy is that businesses establish and preserve their financial records with caution. The accounting period concept of conservatism holds that the company must set aside money to cover any potential losses or expenses, but it ignores the possibility of future profits.

Consistency

To compare the financial statements of different periods or, for that matter, several entities, the accounting policies are constantly followed.

Materiality

Financial statements should reflect all of the factors that significantly impact a company’s bottom line, according to the idea of materiality. There is an exception for items that do not significantly influence the company’s business and do not justify the work required to document them.

Purpose of Accounting Concepts

• The primary goal of the accounting concepts is to ensure that financial statements are prepared and maintained consistently.
• Accountants use it as an underlying principle to aid them in producing and maintaining the company’s financial records.
• With this effort, all organisations can share and understand the rules and assumptions that must be followed to provide accurate and comparable financial data.

Accounting Concepts are Critical

• When recording a financial transaction for an organisation, every step of the accounting process involves using accounting concepts.
• Accountants can save time, effort and energy by adhering to accounting ideas that are widely accepted.
• It enhances the quality of financial statements and reports by making them easier to understand, more reliable, more current and more comparable.

Accounting: Convention vs Concept

Accounting ideas and norms are often used interchangeably in everyday speech. There are, however, several differences between the two.

Accounting concepts

• A set of guidelines and assumptions that must be followed when keeping track of financial transactions
• The country’s accounting bodies usually follow internationally accepted accounting policies in setting rules and assumptions.
• It must be followed at every stage of recording the business’s transactions.
• An accounting theory is used to prepare and maintain books of accounts.

Accounting Convention

• This is a term used to describe the commonly recognised accounting methods.
• A company’s accounting processes are referred to as “conventions.” Accounting bodies have agreed to accept the conventions in practice even though any specific accounting authority does not authorise them.
• It should be followed when preparing an entity’s financial statements
• It is a methodology that is used in the creation of picture post books.

Conclusion

Accounting concepts are the universally recognised rules and assumptions that accountants use to help them prepare financial statements. It establishes a structure for recording the company’s financial transactions. In layman’s terms, these are the fundamental components of the accounting system, with the primary purpose of offering consistent financial information to all important stakeholders and investors.