Summary about Accounting Concepts
In preparing financial statements, certain fundamental accounting concepts are adopted as a framework.
Two such accounting concepts are identified in financial reporting standards accounting policies as the bedrock of accounting.
- The going concern concept. Unless there is evidence to the country, it is assumed that a business will continue to trade normally for the foreseeable future.
- The accruals or matching concept. Revenue earned must be matched against expenditure incurred in earning it.
A number of other accounting concepts may be regarded as fundamental.
- The prudence concept. Where alternative accounting procedures are acceptable, choose the one which gives the less optimistic view of profitability and asset values.
- The consistency concept. Similar items should be accorded similar accounting treatments.
- The entity concept. A business is an entity distinct from its owners.
- The money measurement concept. Accounts only deal with items to which monetary values can be attributed.
- The separate valuation principle. Each component of an asset or liability must be valued separately.
- The materiality concept. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.
- The historical cost convention. Transactions are recorded at the cost when they occurred.
- The stable monetary unit. The value of the unit in which accounting statements are prepared does not changed.
- Objectivity. Accountants must be free from bias.
- The realization concept. Revenue and profits are recognized when realized.
- Duality. Every transaction has two effects.
- Substance over form. Transactions must be presented and accounted for in accordance with their substance and financial reality and not merely with their legal form.