Accounting concepts

Accounting concepts
See also

The accounting concepts are defined as generally acceptable statements, consistent with the objectives of the financial statements, reflecting the nature of the accounting entity. Accounting as an information system uses various concepts using them for its own needs. The result of the adopted theoretical accounting concepts there is financial statements.

Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature about economic entities that is intended to be useful in making economic decisions - in making reasoned choices among alternative courses of action.” (Percy C. Garcia, Benjamin Q. Mojar, Bienvenido A. Gemanil, 2006, s. 2)

Basic accounting concepts

The concepts are widely accepted and used in practice by preparers of financial statements and by auditors while verifying such statements (Banerjee, B K, 2010 s. 16-18).

  • Entity Concept The entity's concept assumes that the financial statements and other accounting information related to a specific enterprise that is different from its owners. Therefore, the analysis of business transactions including costs and revenues is expressed in terms of changes in the financial conditions of the company. This concept allows us to distinguish between personal and business transactions. This concept applies to all forms of business organizations, such as sole proprietorships, partnerships, companies and small and large enterprises.
  • Cost Concept The cost concept requires that assets be recorded in the books at their cost, i.e. the price paid or payable for the purchase of the asset. The cost of an asset may be higher or lower than the fair market price, but it should be recorded at the actual price. The concept of costs does not allow to show assets at their current value, because the market prices of assets are constantly changing. Because an asset is used to create goods and services, its cost expires, which is referred to as depreciation.
  • Matching Concept The concept of matching in accounting is the process of matching expenses to revenues based on the accrual system. This concept highlights which cost items are expenses in a given accounting period. This means that costs are recognized as expenses in the accounting period in which revenues related to these costs are recognized. Revenue must be taken into account in the accounting period in which the goods are sold or services rendered, and expenditure must be included in the accounting period in which they are used to generate or generate revenue. Actually, according to the matching principle, costs are recognized for a given accounting period and treated as costs incurred during that period. It is assumed that the right match occurs only when a reasonable relationship between revenue and expenditure is found.
  • Realization Concept or Revenue Recognition Concept According to this concept, revenue is considered to be earned when the goods have been transferred or services rendered to the customer. Revenues are recorded in the books as received or deemed to be received under the implementation convention. According to this convention, no income or profit can be gained until the sale has been made.
  • Accounting Period Concept Financial accounting provides information on the business activity of an enterprise in specific periods that are shorter than the useful life of the enterprise. Usually, the periods are of equal length to facilitate comparison. These periods are usually twelve months and at the end of this period financial statements are prepared to determine the results of operations. Thus, the abovementioned 12-month period is known as the accounting period. According to the convention of periodicity, accounting revenues or gains are the results of the entire transaction over the accounting period. The periodicity convention is currently established by provisions on the preparation of reports, such as the income statement and the balance sheet.
  • Money Measurement Concept According to this concept, all events/facts or transactions that occur during the accounting period that change the financial position of an enterprise or company and are measurable in terms of money should be recorded in the financial accounts. Events/facts that have a direct impact on business but that cannot be measured in monetary terms are not included in the financial accounts.

Among accounting concepts, we can distinguish the going-concern concept, accrual concept, conservatism concept, consistency concept, materiality concept, full disclosure concept, dual-aspect concept (Banerjee, B K, 2010 s. 16-18).

References

Author: Weronika Chudzik