Understanding accounting concepts is one of the most essential parts of running a business. These concepts help you make intelligent financial decisions and keep your company successful in the long run. Accounting concepts are the basic ideas and assumptions of accounting that create a framework for financial accounting. These principles ensure that financial statements are prepared consistently. This consistency makes it easier to compare different businesses’ performance and financial positions over time, which is helpful when making crucial business decisions.
10 Accounting Concepts
Here are ten important accounting concepts given below;
1. The Going Concern Concept
This concept presupposes that the business will remain in existence soon and shall not close. Accountants also presume that all the balance sheet assets are permanent and will be used by the company in business for a considerable period. Thus, they do not hold any re-sale or realization value.
2. Accrual Basis of Accounting
This principle recognizes revenue and expenses when earned and incurred, even if the cash still needs to change hands. For example, if a company provides services without payment, it still records the revenue. This method better shows the company’s financial performance.
3. Business Entity Concept
This concept postulates that a business organization should be treated differently from its owner. Business affairs should not be palmed with the owner’s affairs, and expenses, revenues, debts, and assets should not be shared. This also makes booking the business’s costs, incomes, and other tax reliefs easier. It also safeguards the owner’s capital and contributes to the creation of his credit history.
Ensuring that the company’s operating and owners’ funds are distinguished makes the business’s cash amount and financial situation clear. It helps the stakeholders and creditors formulate relevant decisions that consider the company’s performance, not the amount owned by the owner.
4. Full Disclosure Concept
The disclosure concept entails that a business must avail all the information that any person who uses the financial statements and reports needs for investment, taxation, or audit purposes. This concept allows investors, creditors, shareholders, clients, and other users to get important financial information. Information considered as disclosure encompasses revenue, depreciation, inventory, taxes, earnings, stock value, leases, and liabilities.
5. Dual Aspect Concept
The dual aspect accounting concepts are used for every transaction affecting two business accounts. A business must record both sides to ensure accurate accounting. Each financial transaction has a credit and debit or a giver and receiver aspect. If both sides are not recorded, it can cause errors in the final accounting records. The dual aspect concept is the basis of the double-entry system of bookkeeping, which is the standard method for auditing and taxation.
6. Income Measurement Objective
The income measurement objective means a business’s income should be measured accurately and consistently over time. This is done by following accounting standards like GAAP and IFRS. Joining accounting online courses allows one to understand this concept quickly.
7. Cost-Benefit Analysis
Cost-benefit analysis involves comparing the costs of following a certain accounting standard or procedure with its benefits. If the benefits exceed the costs, it is usually better for the organization to adopt that standard or procedure.
8. Historical Cost Concept
The historical cost concept means a business records assets and liabilities at their original purchase cost instead of their current market value. This helps keep financial information consistent and reliable, but using current values might lead to inaccuracies and inconsistencies in financial records.
9. Conservatism Principle
The conservatism principle states that accountants should record expenses as soon as they occur but only revenues when earned. This helps make financial reports more cautious and less likely to overstate profits.
10. Materiality Principle
The materiality principle states that financial statements should include only important information that could affect a stakeholder’s decisions. More significant details should be included. What is considered important can vary depending on the situation.
What are the Different Methods of Accounting?
There are three main accounting methods: Accrual basis, Cash basis, and Modified cash basis.
- Accrual Basis: This method records revenues when earned and expenses when incurred, regardless of when cash changes hands. It gives a complete view of profits and losses for a period.
- Cash Basis: This is the simplest method. It records revenues only when cash is received and expenses only when money is paid.
- Modified Cash Basis: This method mixes the two approaches. It records revenues when earned and received, but expenses are recorded only when cash is paid.
To learn more about accounting, check out Finprov Learning. Finprov offers accounting courses and a variety of programs in Kerala. Our courses for graduates include CBAT, PGBAT, Income Tax, Practical Accounting Training, PGDIFA, DIA, GST, SAP FICO, Tally Prime, MS Excel, and more. Whether you are a graduate or a professional, our courses are designed to provide a thorough learning experience.
We focus on both theory and practical training to give you real-world skills. We also offer accounting professional courses with placement assistance to help you start your career after you complete your training. Contact Finprov today to explore accounting opportunities and boost your knowledge for a successful future.
