Premium Essay

Concepts of Accounting

In: Business and Management

Submitted By anando
Words 454
Pages 2
Concepts of Accounting

Meaning

• Accounting is often called the language of business since people in the business world such as owners, managers, bankers all use accounting terms.

• Accounting is defined as the art of recording, classifying, summarizing, analyzing, interpreting and communicating the results of transactions and events which are of financial character.

• The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations.

• Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit.

Elements of Accounting

If complete records are to be maintained, all transactions and operations that affect the accounting elements must be recorded.

The elements of accounting are-

Assets
Liability
Owner’s equity or proprietorship

The relationship among three of these elements of a business can be expressed in the form of simple equation. That is,

• Asset= Liability+ Owner’s equity.

• Balance sheet is a detailed statement of this equation. It means that it is a basic principle of accounting that the total of the assets of all types is equal to the sum of the liabilities and proprietorship.

 Asset: An asset is something (a resource) that the company currently owns and uses to get the business functioning.

 An asset can be an item without which the company would not operate. For example, for a car rental company, an asset can be the car that a customer comes to rent.

 Liability: A liability is an obligation that a business has towards an external entity, based on a previous transaction.

• It is an obligation of the business to pay a debt.
• The most common liability of business is accounts payable.
• Proprietorship: The amount by which the business assets exceed this

Similar Documents

Premium Essay

Accounting Concepts

...Business Accounting 10 Key concepts of accounting Done by-Bemnet A.Mamo ID number-B0129FSFS0813 School of Business and Law 10/15/2013 Contents * Introduction……………………………………………. 2 Going concern……………………………………….. 3 Consistency……………………………………………. 3 Prudence……………………………………………….. 4 Accruals…………………………………………………. 4 Objectivity……………………………………………… 5 Realization…………………………………………….. 5 Dual aspect……………………………………………. 6 Materiality…………………………………………….. 7 Money Measurement……………………………. 7 Timeliness……………………………………………… 8 * Conclusion………………………………………………. 9 * References………………………………………………. 10 Introduction Accounting generally can seem to be a practical subject that would be very simple to focus on only the applications of procedures and techniques. But it is far more than just a bunch of calculations, until we can identify and interpret our production of the figures, the calculations are pointless. It also measures the works of a business in financial terms and provides various financial statements and reports for various transactions the business agrees (e.g., buying and selling goods) assumed the business. In organizing financial statements, accountants use certain fundamental concepts when constructing financial accounts and statements. Traditionally there are four main concepts; ...

Words: 1687 - Pages: 7

Premium Essay

Accounting Concepts

...money Conclusions Accounting Concepts and Conventions Introduction Accounting concepts and conventions as used in accountancy are the rules and guidelines by that the accountant lives. All formal accounting statements should be created, preserved and presented according to the concepts and conventions that follow. In the United Kingdom, four of the following accounting concepts are laid down in Statement of Standard Accounting Practice number 2 (SSAP 2: Disclosure of Accounting Policies), they are the * Going concern concept * Accruals or matching concept * Consistency concept * Prudence concept Going concern This concept is the underlying assumption that any accountant makes when he prepares a set of accounts. That the business under consideration will remain in existence for the foreseeable future. In addition to being an old concept of accounting, it is now, for example, part of UK statute law: reference to it can be found in the Companies Act 1985. Without this concept, accounts would have to be drawn up on the 'winding up' basis. That is, on what the business is likely to be worth if it is sold piecemeal at the date of the accounts. The winding up value would almost certainly be different from the going concern value shown. Such circumstances as the state of the market and the availability of finance are important considerations here. Accruals Otherwise known as the matching principle. The purpose of this concept is to make sure that...

Words: 1931 - Pages: 8

Premium Essay

Accounting Concepts

...Accounting Concepts MODULE - 1 Basic Accounting 2 ACCOUNTING CONCEPTS In the previous lesson, you have studied the meaning and nature of business transactions and objectives of financial accounting. In order to maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. These are foundations of preparing and maintaining accounting records. In this lesson we shall learn about various accounting concepts, their meaning and significance. Notes OBJECTIVES After studying this lesson, you will be able to : explain the term accounting concept; explain the meaning and significance of various accounting concepts : Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realisation Concept, Accrual Concept and Matching Concept. 2.1 MEANING AND BUSINESS ENTITY CONCEPT Let us take an example. In India there is a basic rule to be followed by everyone that one should walk or drive on his/her left hand side of the road. It helps in the smooth flow of traffic. Similarly, there are certain rules that an accountant should follow while recording business transactions and preparing accounts. These may be termed as accounting concept. Thus, this can be said that : Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions...

Words: 4787 - Pages: 20

Premium Essay

Accounting Concepts

...Question 1 Explain using various examples,how the major accounting concepts are used in preparing financial statements. Accounting is the language of business and it is used to communicate finance information. In order for that information to make sense, accounting is based on 11 major concepts significantly. These fundamental concepts then form the basic for all of the Generally Accepted Accounting Principles (GAAP). And these are the major concepts: 1. Historical Cost Concept 2. Prudence Concept 3. Economy Entity Concept 4. Money Measurement Concept 5. Time Period Concept 6. Going Concern Concept 7. Dual Aspect Concept 8. Revenue Recognition Concept 9. Matching Concept 10. Consistency Concept 11. Materially Concept In light of these concepts, the three key financial statements namely Balance Sheet, Profit and Loss and Cash Flow statements are analyzed. 1.Historical Cost Concept : A principle which states that companies should record assets at their cost is called Historical Cost Concept. Most assets held on the balance sheet are to be recorded at their historical cost even if they have changed significantly in value over time. Historical cost is the value of a resource given up or a liability incurred to acquire an asset/service at the time when the resource was given up or the liability incurred. The concept of historical cost is important because market values change so often that allowing...

Words: 1874 - Pages: 8

Premium Essay

Accounting Concept

...| Accounting Concepts | Adhered / Violated | 1. A sole proprietor has sold his private yacht, but it has not recorded anything about it on the business record. | Objectivity | Adhered | 2. An equipment has been bought from a supplier at a huge trade discount, and this has been entered in the books at the figure even though it is worth more on the market. | Objectivity + Cost | Adhered | 3. Carissa Ng, the owner of Dress-up boutique, sold some dresses for S$250 on 10th Aug 2012. However she only received the money on the 19th Aug 2012. Hence she recorded the sale on 19th Aug 2012 | Objectivity | Adhered | 4. A receipt was issued by the business after receiving the money for goods sold. | Objectivity | Adhered | 5. Helena has been the proprietor of Home’s Laundry Services for a number of years. Recently, the business has been struggling and she is uncertain as to whether she will continue her business next years. She has decided to base on what she expects to receive if she decides to sell the firm’s assets | Going Concern | Violated | 6. Raja Vatsan does not think it is necessary to prepare a profit and loss statement and balance sheet every year. He has been in business operating under the same name Raj Vat Shop for five years now and has just completed the financial reports for the three year period to show a profit of $70,000 | | | 7. The purchase of some hole punchers and staplers was recorded as fixed assets | Materiality | Violated | ...

Words: 399 - Pages: 2

Premium Essay

Accounting Concepts

...Accounting Concepts i. Accounting/Business entity The business is an entity (or body) separate from its owner. Entity means a distinctive existence. ii. Consistency The accounting treatment applied to an item should be the same for all accounting periods, unless there is a valid reason for change and the effect of such changes are disclosed. This is to enable meaningful comparisons between two or more accounting periods to be made. iii. Accounting period Assuming that the business is a going concern, the life span of a business entity is divided into fixed periods of time to enable financial reports to be prepared for that particular period. iv. Accrual concept Revenue is recognized when earned and expenses when incurred. Revenue received (or expenses paid) but not yet earned (incurred) cannot be recognized. v. Duality concept This is the concept at the heart of the system in accounting known as “double entry system” (see Chapter 3). It relies on the fact that each transaction represents an exchange of resources, and hence there will be two equal and opposite aspects to each accounting record. vi. Going concern concept It is assumed that the business will continue to operate for an indefinite period of time. Thus, assets are valued at historical cost rather than market or saleable value. vii. Historical cost concept All business transactions are recorded at the cost at the time it took place. viii. Matching principle ...

Words: 363 - Pages: 2

Premium Essay

Concept of Accounting

...A SHORT HISTORY OF ACCOUNTING AND BUSINESS By Gary Giroux September 1999 Preface Overview: Accounting toward the 21st century: Where are we now? How did we get here? 1. From the Ancient World to Pacioli The First Cities Trade Tokens: The First Accounting The Sumerians Complex Tokens and Clay Tablets Cuneiform Writing and Beyond Money, Banking and Credit The Dark Ages and the Rise of the Italian Merchants Luca Pacioli: The Father of Accounting 2. Britain and the Industrial Revolution Prior to 1750 Ironbridge Textiles The Steam Engine Wedgwood and the Importance of Cost Accounting Early Cost Accounting Transportation Development of the Accounting Profession 3. American Big Business and Cost Accounting Early Developments in Manufacturing and Accounting Rockefeller Morgan and Carnegie Cost Accounting in the Era of Big Business Alternative Systems in Asia and Europe Relevance Lost: The Critique of Johnson and Kaplan The American Response 4. Financial Accounting and the Structure of Accounting Regulation The Great Crash and Government Response The New Role of the Accounting Profession The Financial Accounting Standards Board Earnings Management and Economic Consequences Accounting Principles and the Conceptual Framework 5. Auditing Auditing in the U. S. The Big...

Words: 1749 - Pages: 7

Premium Essay

Accounting Concepts

...8.0 Explanation and meaning of the following concepts and conversion 8.1 ENTITY CONCEPT Entity concept is an accounting principle which refers to a business or organisation as separate and distinct entity in its own right, meaning that any business transaction associated with the business should be recorded separately from the transaction of its investors, they are two separately identifiable parties. It simply means that accounting records and reports are concerned with the business entity, not with the people associated with the business. 8.2 MATCHING CONCEPT The matching concept refers to the accounting principle used to record and categorize the expenses of a business and then associating it with revenue earned by the organisation in the same accounting period as each other. The expenses for that period constitute the costs of the assets used by a business to acquire revenue which is documented for that accounting period. 8.3 HISTORIC COST CONCEPT Historic cost concept refers to the accounting theory of the cost of value of assets carried in the financial position statement and reflecting the cost of the item at the time it was purchased, rather than its current value. The present price is generally described in various ways, such as current replacement price or current realisable worth; it is argued that recording of resources at the present price would help to give a better perception view of the financial positional statement. For example, if a trader acquired...

Words: 444 - Pages: 2

Premium Essay

Accounting Concept

...use. Conversely, liabilities of an entity should not be presented below the amount that is likely to be paid in its respect in the future. There is an inherent risk that assets and income of an entity are more likely to be overstated than understated by the management whereas liabilities and expenses are more likely to be understated. The risk arises from the fact that companies often benefit from better reported profitability and lower gearing in the form of cheaper source of finance and higher share price. There is a risk that leverage offered in the choice of accounting policies and estimates may result in bias in the preparation of the financial statements aimed at improving profitability and financial position through the use of creative accounting techniques. Prudence concept helps to ensure that such bias is countered by requiring the exercise of caution in arriving at estimates and the adoption of accounting policies. Example: Inventory is recorded at the lower of cost or net realizable value (NRV) rather than the expected selling price. This ensures profit on the sale of inventory is only realized when the actual sale takes place. However, prudence does not require management to deliberately overstate its liabilities and expenses or understate its assets and income. The application of prudence should...

Words: 1824 - Pages: 8

Premium Essay

Accounting Concepts

...Accounting Basics Important Disclaimer Important Note: The text in this chapter is intended to clarify business-related concepts. It is not intended nor can it replace formal legal advice. Before taking any actions relating to your business, always consult your accountant or a business law/tax attorney. The Need for Accounting Every organization needs to maintain good records to track how much money they have, where it came from, and how they spend it. These records are maintained by using an accounting system. Accounting for Windows Accounting Basics • 5 These records are essential because they can answer such important questions as: • Am I making or losing money from my business? • How much am I worth? • Should I put more money in my business or sell it and go into another business? • How much is owed to me, and how much do I owe? • How can I change the way I operate to make more profit? Even if you do not own or run a business, as an accountant you will be asked to provide the valuable information needed to assist management in the decision making process. In addition, these records are invaluable for filing your organization’s tax returns. The modern method of accounting is based on the system created by an Italian monk Fra Luca Pacioli. He developed this system over 500 years ago. This great and scientific system was so well designed that even modern accounting principles are based on it. In the past, many businesses maintained their records manually...

Words: 10549 - Pages: 43

Premium Essay

Accounting Concepts

...Contract costing is an extension of job costing method, whereby the job to be carried out is not a small job of printing cards, fabricating machines etc., but the job involved is a big job to construct building etc., under a contract. In the history of costing, when contract costing was introduced as a method of costing, financial accounting already had a system of accounting for construction contracts. The same system was adopted under cost accounting as well. This is the reason why contract costing has more linkage with financial accounting concepts. The parties involved under a construction contract: 1. Contractor, who undertakes to construct any building etc. 2. Contractee, the person for whom the construction is carried out. The objective is to ascertain on year to year basis, profit from each contract in the financial statements of the contractor. This is done by preparing a Contract A/c in the books of contractor. The nature of Contract A/c is that of final accounts that reveal profit or loss as a result. There are following situations that may arise for any construction contracts: 1. The contract begins as well as ends in the same year (Completed contract). 2. Contracts for which construction begins during the year but does not complete by the year end (Incomplete contract). 3. Contracts for which construction was incomplete at the beginning of the year and remains incomplete till the end of the year. 4. Contracts for which construction was incomplete...

Words: 3206 - Pages: 13

Free Essay

Accounting Concepts

...The Importance of Technology to the Business INTRODUCTION A. Nowadays, technology has become very important in the business world, no matter small or big business. If we take away technology, all the business around the world would become standstill. So, why technology is important to the business? B. Do you know what technology is? Technology is humans using objects to change the natural and human-made environment as well as business. C. My name is Ee Chun Kit. I am second semester student from Diploma in Finance and Investment. Today, I would like to talk about some of the important of technology to the business. D. First and foremost, technology can provide more useful and relevant works for employees. Besides, technology can also improve business communication. Last but not least, technology is important to provide better service to customers. [Let me start with the first importance of technology to business which is provides more useful and relevant works for employees.] BODY 1. Provides more useful and relevant works for employees I. We should not need to spend our time on performing repetitive work that computers could do for us. II. All we would need to do is provide the input, the system would then do the processing, and provide an output. [Technology not only can provide more useful and relevant works for employees, but it can also improve business communication.] 2. Improves business communication I. Technology has allowed...

Words: 353 - Pages: 2

Premium Essay

Accounting Concepts and Conventions

...Basic Accounting Concepts The basic accounting concepts are referred to as the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accounting profession. The important concepts have been listed as below: • Business entity; • Money measurement; • Going concern; • Accounting period; • Cost • Dual aspect (or Duality); • Revenue recognition (Realisation); • Matching; • Full disclosure; • Consistency; • Conservatism (Prudence); • Materiality; • Objectivity. 2.2.1 Business Entity Concept The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business. The accounting records are made in the book of accounts from the point of view of the business unit and not that of the owner. The personal assets and Theory base of Accounting25 ...

Words: 1190 - Pages: 5

Premium Essay

Basic Accounting Concept

...Basic Accounting Concepts Vai Ma’ake University of Idaho Financial Accounting ACCP/537 March 19, 2011 Introduction To identify and describe the sources of generally accepted accounting principles (GAAP). Also identify the source hierarchy and explain why the hierarchy is important. Describe effective accounting information using the qualities of accounting information and how an accrual basis of accounting system is different from a cash basis of accounting. Finally, describing the different types of business structures and the defining features of each structure (University of Phoenix Syllabus, 2011). Basic accounting concepts In successfully running and operating a business, business structure and basic accounting concepts must be present to operate well. The generally accepted accounting principles also known as the (GAAP) set standards to the financial statements. The standards set by the GAAP must also include effective accounting information. Companies do have the option either to use accrual basis of accounting or cash basis of accounting. However, under the GAAP it does accept cash basis accounting. Companies will determine the type of business to do business in. However, these decisions do makes the difference in how successful a company is. [pic]GAAP The GAAP are standards, which are universally practiced and generally accepted in accounting. These standards and rules are for accountants to use in compiling...

Words: 767 - Pages: 4

Free Essay

Basic Accounting Concepts

...Basic Accounting Concepts and Business Structures Accounting is referred to by many as the language of business. Accounting is used throughout the business world and around the globe. Business accounting starts with (GAAP) which stands for Generally Accepted Accounting Principles; “These are guidelines or, more precisely, a group of objectives and conventions that have evolved over time to govern how financial statements are prepared and presented” ("What Are Generally Accepted Accounting Principles? | Government Bodies & Offices from AllBusiness.com," 2010). Those who report financial statement information must be aware of GAAP. The Federal Accounting Standards Advisory Board (FASAB) is responsible for establishing and maintaining GAAP. GAAP Hierarchy The hierarchy of GAAP is broken into four categories consisting of A, B, C and D. Category A holds the most authority. This category establishes the principles set forth by the Federal Accounting Standards Advisory Board (FASAB). Category B consists of technical bulletins, audit and accounting guidelines which adhere to the American Institute of CPA’s standards and are cleared by the FASAB. The C category consists of “technical releases from the Accounting and Auditing Policy Committee of the FASAB” ("Generally Accepted Accounting Principles," n.d.). The last category is D; this category consists of implementing guides which are published by the FASAB. These guides also provide practices which are common and...

Words: 879 - Pages: 4