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Accounting Principles or Concepts

Accounting principles and concepts provide consistency and credibility to the accounting profession. Some key concepts include: - Business entity tracks financial transactions separately from owners' personal finances. - Money measurement expresses all items in monetary terms for accounting. - Historic cost records transactions at original purchase price, and depreciation reduces this over time. - Accruals matches revenues to the period earned and expenses to the period incurred, rather than when cash is received or paid. - Going concern assumes the business will continue operating into the foreseeable future.

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Helen B. Evans
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54 views

Accounting Principles or Concepts

Accounting principles and concepts provide consistency and credibility to the accounting profession. Some key concepts include: - Business entity tracks financial transactions separately from owners' personal finances. - Money measurement expresses all items in monetary terms for accounting. - Historic cost records transactions at original purchase price, and depreciation reduces this over time. - Accruals matches revenues to the period earned and expenses to the period incurred, rather than when cash is received or paid. - Going concern assumes the business will continue operating into the foreseeable future.

Uploaded by

Helen B. Evans
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
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Accounting principles or concepts

What are principles or concepts


Basically, concepts are assumptions that are applied when recording and summarising financial transactions. To bring about consistency within the accounting profession Important for the credibility of the accountants, and for the reliability of the financial results that they report.

KEY ACCOUNTING CONCEPTS


Business entity Money measurement Historic cost Realisation Duality Consistency Materiality Accruals Prudence Going concern Substance over form

Business entity concept


Accounts are kept for entities and not the people who own or run the company. The idea here is that the financial transactions of one individual or a group of individuals must be kept separate from any unrelated financial transactions of the business owned by those same individuals.

Money measurement concept


For an accounting record to be made it must be able to be expressed in monetary terms. Any item which cannot be expressed in money terms are therefore not accounted for. Consider a situation where there is a labor strike or the business owners health is failing; these situations have a huge impact on the operations and financial security of the company but this information is not reflected in the financial statements.
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Realization concept
Revenues are recognized when they are earned or realized. Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or services. For instance, if a company is awarded a contract to build an office building the revenue from that project would not be recorded in one lump sum but rather it would be divided overtime according to the work actually being done.
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Duality concept
his concept is the basis of T fundamental accounting equation: Assets = Capital + Liabilities All accounting transactions must keep this equation balanced. Hence all transactions are recorded twice (a debit and a corresponding credit entry).
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Consistency concept
Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.
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Materiality concept
Only events that are significant enough to justify the usefulness of information are recorded Technically, each time a sheet of paper is used, the asset Office supplies is decreased but this transaction is not worth accounting for. An amount may be considered material in the accounts if its inclusion in, or omission from the financial statements would affect the way people would read or interpret those financial statements
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Accruals (Matching) concept

Revenues should be recognized (i.e. included in Income Statement) in the period in which they are earned, not necessarily when they are received in cash. Example: a sale made to a customer on credit just before the year-end would be included in that year's Income Statement, even though the cash may not be received until the following year.

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Accruals (Matching) concept


In the same way, expenses are recognised according to the period to which they relate (i.e when they are incurred), and not when they are paid. For example, an electricity bill not paid by the year-end would still be charged in that year's Income Statement whereas rates paid in advance would be held back and not charged until the next year.

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Prudence concept
Prudence is about profits and assets not being overstated and Losses and liabilities being provided for as soon as they are recognised The rule is to recognize revenue when it is reasonably certain and recognize expenses as soon as they are reasonably possible. The reasons for accounting in this manner are so that financial statements do not overstate the companys 12 financial position.

Going concern concept


When preparing financial statements, management should make an assessment of an enterprise's ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so. The going concern concept thus assumes that the firm will continue to operate and not close down in the foreseeable future.
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Substance over form


It can happen that the legal form of a transaction can differ from its real substance. When this happens, accounting should show the transaction in accordance with its real substance which is, basically, how the transaction affects the economic situation of the business. This means that accounting in this instance will not reflect the exact legal position concerning the transaction.
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Historical cost concept


A transaction is recorded at the amount actually paid for it. Because the worth of an asset changes over time it would be impossible to accurately record the market value for the assets of a company. The cost concept does recognize that assets generally depreciate in value and so accounting practice removes the depreciation amount from the original cost, shows the value as a net amount, and records the difference as a cost of operations (depreciation expense.)
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