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Details of Accounting Concept and Principles

Accounting Concepts and Principles are a set of broad conventions that...
Course

Association chartered of certified accountant (SBL2020)

33 Documents
Students shared 33 documents in this course
Academic year: 2015/2016
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Rook Rook
London College of Accountancy
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Accounting Concept and Principles

Accounting Concepts and Principles are a set of broad conventions that have been devised to provide a basic framework for financial reporting. As financial reporting involves significant professional judgments by accountants, hence these concepts and principles ensure that the users of financial information are not mislead by the adoption of accounting policies and practices that go against the spirit of the accountancy profession.

Accountants must therefore actively consider whether the accounting treatments adopted are consistent with the accounting concepts and principles.

In order to ensure application of the accounting concepts and principles, major accounting standard- setting bodies have incorporated them into their reporting frameworks such as the IASB Framework.

Following is a list of the major accounting concepts and principles:

Relevance Reliability Matching Concept Timeliness Neutrality Faithful Representation Prudence Completeness Single Economic Entity Concept Money Measurement Concept Comparability/Consistency Understandability Materiality Going Concern Accruals Business Entity Substance over Form Realization Concept Duality Concept Historical Cost Verifiability Concept

In case where application of one accounting concept or principle leads to a conflict with another accounting concept or principle, accountants must consider what is best for the users of the financial information.

An example of such a case would be the trade off between relevance and reliability. Information is more relevant if it is disclosed timely. However, it may take more time to gather reliable information.

Whether reliability of information may be compromised to ensure relevance of information is a matter of judgment that ought to be considered in the interest of the users of the financial information.

Importance:

The following advantages are associated with proper use of accounting concepts and principles: 1. Accounts prepared in accordance with generally accepted accounting principles and concepts are more accurate and reliable.

  1. The users of financial statements attach greater credibility to the statements that have been prepared in accordance with generally accepted accounting principles. Hence, if a business wishes to win confidence of its banks, lenders or major suppliers, it must follow these principles while preparing its accounting statements.

  2. Companies often find it useful to compare their performance with other organizations in the same business. No comparison would be meaningful, or indeed possible, unless all the accounting statements have been prepared on the basis of the same agreed principles and assumptions.

  3. Following laid down rules makes the job of an accountant easier. He is saved the trouble of making subjective decisions. For example, having a laid down policy on what is considered material for the purpose of recording expenses or capitalization can save a lot of hassle for the accounting staff. Once the organization limit is set, it makes accounting much simpler.

  4. Following accounting concepts, principles and standards may not be a matter of choice. In most countries, law prescribes that businesses that are operating at a certain level must follow them. Similarly, most professional or trade associations require their members to follow these standards as a matter of essential requirement for continued membership. Similarly, lenders often refuse to lend funds to businesses whose accounts are not in accordance with standards.

Types of accounting principles

Accounting Principles involves accounting concepts and accounting conventions. For you to understand the accounting principles, you need to know these accounting concepts and conventions.

Let us first understand the accounting concepts as a first step to get the accounting principles right. Among the several accounting concepts, the following are some of the important.

Money measurement principle: In accounting, all the business transactions are measured in terms of money as a common unit of measurement. Since money is the common unit of measurement, as an accounting principle, you are allowed to record only those transactions or events which can be measured or expressed in terms of money.  Business entity concept: This concept of accounting principle views business and business owner separately as far as their financial transactions are concerned. Legally, your business can exist independently of you and your firm can sue or can be sued in its own name.  Going-concern principle: This principle applies that all the transactions are recorded on the assumption that business will remain in operation for a long time and will be able to carry out its obligations as per the plan.  Cost principle: This accounting principle sets the rules for accounting the fixed assets. According to the cost principle, all the fixed assets are accounted at the original price i. the price paid to procure it and subsequently, every year, value is depreciated based on usage, wear and tear, accidents, the passage of time etc.  Dual-aspect concept: This accounting principle states that for every debit, corresponding credit is made. This is the foundation on which accounting system is carried out. This is

important for you to understand in detail. Read our article ‘ Accounting – The Language of Business’ to know more about it.  Accounting year concept: This implies that each business chooses a specific time period to complete the accounting cycle and financial reporting. In short, this principle talks about the periodicity of accounting. The period can be monthly, quarterly or annually.  Matching concept: The concept stress on the Accounting principle that if any revenue is recognized then expenses related to earn that revenue should also be recognized. This gives a true picture of profit earned during the accounting period.  Realization concept: The accounting concept implies that revenue is reported when it’s earned, regardless of when payment is received. Anything paid or received is not considered as profit until the goods or services have been delivered to the buyer

Accounting conventions

After accounting concepts, the next important part of accounting principles is accounting conventions. Accounting conventions refers to a set of customs and traditions that guide the business in preparing the accounting statement. These conventions are derived by usage and practice. The following are the 4 accounting conventions:

Consistency: consistency is a fundamental assumption that states accounting practices and policies are consistent from one period to another.  Full disclosure: This convention as part of accounting principles implies that the accounts should be prepared in a manner that all material information is clearly disclosed.  Conservatism: This convention takes into consideration all prospective losses and leaves all prospective profit until they are earned.  Materiality: In the materiality principle, all the items having a significant economic effect on the business should be disclosed in the financial statement. All unimportant items are either ignored or merged with other items.

Conclusion

In the end, the aim of accounting is to keep systematic records to ascertain financial performance and financial position of an entity and to communicate the relevant financial information to the interested user groups.

The accounting financial statements are basic means through which the management of an entity makes public communication of the financial information along with selected quantitative details. And such quantitative details could well be maintained with help of ERP Systems such as Tally 9 following the Accounting Principles laid by statutory organizations.

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Details of Accounting Concept and Principles

Course: Association chartered of certified accountant (SBL2020)

33 Documents
Students shared 33 documents in this course

University: London College of Accountancy

Was this document helpful?
Accounting Concept and Principles
Accounting Concepts and Principles are a set of broad conventions that have been devised to provide a
basic framework for financial reporting. As financial reporting involves significant professional
judgments by accountants, hence these concepts and principles ensure that the users of financial
information are not mislead by the adoption of accounting policies and practices that go against the spirit
of the accountancy profession.
Accountants must therefore actively consider whether the accounting treatments adopted are consistent
with the accounting concepts and principles.
In order to ensure application of the accounting concepts and principles, major accounting standard-
setting bodies have incorporated them into their reporting frameworks such as the IASB Framework.
Following is a list of the major accounting concepts and principles:
Relevance
Reliability
Matching Concept
Timeliness
Neutrality
Faithful Representation
Prudence
Completeness
Single Economic Entity Concept
Money Measurement Concept
Comparability/Consistency
Understandability
Materiality
Going Concern
Accruals
Business Entity
Substance over Form
Realization Concept
Duality Concept
Historical Cost
Verifiability Concept

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