Importance of Accounting Concepts

IMPORTANCE OF
ACCOUNTING CONCEPTS

Table of Contents
INTRODUCTION...........................................................................................................................3
Importance of accounting principles in preparing financial statements.........................................3
Difference between rule based and principle based accounting systems........................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
This study focuses on fundamental concepts of accounting and techniques which are necessary
for a business to follow. The use of these concepts are to record entries as per international
standards to bring a uniformity in matching accounting standards of companies, thus eliminating
confusion. The method is used to check the financial status of the company with financial ratios
in accounting system and also help to know where the company is lacking and how to enhance
profitability. The different types of accounting principles are discussed with their comparisons
and their approach towards accounting.
Importance of accounting principles in preparing financial statements
Accounting is the art of recording, classifying and judging entries in a booking system of all the
purchases or transactions done in a period (Toms, 2019). This helps in keeping a record for
future purposes and helps in judging company's financial health and helps in forecasting the
measures to be taken to achieve business goals. The most conventional basic accounting
concepts used which lays down some concepts as follows:
a) Business Entity Concept: A business is treated as a separate entity than the owner while
recording financial transactions. This is required to not intermingle transactions as this will
impact financial statements. If an owner purchases an asset and rents out for office space this
will be recorded as rent payable for the company and as taxable income for the owner. This helps
in knowing the liabilities as well as liquidity in financial statements (Bujaki, Lento and Sayed,
2019).
b)Money measurement concept: The concept records only those transactions which have a
financial impact on the company. The concept speaks of quantitative impact rather than
qualitative. However it has both pros and cons in recording the financial statement. Qualitative
factors can have a long term impact on financial reports which is a flaw in this concept.
c)Concept of Duality: Also known as dual entry concept, it states transactions to be recorded in
two accounts. For e.g. an entry of debit and credit in a ledger. An invoice issued will generate