MBA Accounting

[GO TO MAIN PAGE FOR ALL TOPICS COVERED UNDER ACCOUNTING CONCEPTS ]

 Append below are the following major Accounting concepts which the author has provided for in his other accounting blog which hopefully explains the concept in a simple manner for readers to understand:-

Key Accounting Concepts/Convention/Principles

In a business in order to account to shareholders/investors/authorities, the financial statements need to follow a certain fixed period of reporting say quarterly, half yearly and yearly. Therefore this Accounting Period Concept is merely the fixing of the period for reporting. In normal cases, it is always a one year period.

Just imagine that Mr A has opened up a company, A Ltd. Mr A personally has a lot of assets. Let say that his business/Company A Ltd has failed/insolvent, without this Business Entity Concept, creditors, authorities can now proceed to takeover his personal assets instead of focussing only on the assets in Company A Ltd.

This Consistency Concept merely reinstates that uniform and consistent policies need to be used to prepare the financial statements otherwise this will greatly confused the readers of financial statement.

This Dual Aspect Concept is the key practise by all accounting personnel as the preparation of accounts is strictly based on this double entry aspect.

Imagine that a big conglomerate where its headquarter is located in UK and a big chunk of its assets say in Mexico has been destroyed by earthquake or being nationlized by the local government and the financial statement did not follow this Full Disclosure Concept to disclose to the shareholders. This would even tantamount to fraud/deliberate “cheating” of the readers of the financial statements.

There are many ways to value the assets of a company for example liquidation method,etc but Going Concern Concept is used namely we assume that the business of a company still continued to go on.

The Historical Cost Concept merely states that when a cost say incurred to buy fixed assets/assets that is the value to be stated in the financial statement despite that the cost of the particular assets have increased drastically. Whatever actually spend/liable to be paid will be stated not the future value/market value.

Like the consistency concept, the Matching Concept helps accounting personnel to ensure that any expenses incurred should be matched to the revenue/sale generated. Costs and revenues need to be matched to reflect the correct picture in the Income Statement.

For Materiality Concept , it is assume that material items of expenses must be picked up in the books of accounts to match with the revenues during the accounting period. Immaterial or inexpensive items like pencils and pens,etc can be taken up when payment is made.

Here, simply money say USD or Sterling or other currencies being used as a standard of measurement : Money Measurement Concept

In the Prudence Or Conservative-Concept ; actual or anticipated costs ( with reliability) must be taken up in the financial statement but gains/revenues cannot just simply be taken up unless concrete evidence are present.

We have the Substance Over Form which merely states that a “dog is a dog”, we cannot change to another form say “a cat” to merely please the whim and fancy of the managers of the business.

This entry was posted on Sunday, October 14th, 2007 at 2:12 am and is filed under a. Accounting Concepts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.