Accounting Concepts and Qualitative Characteristics of Financial Reports

This report discusses the five accounting concepts used by companies to prepare financial statements, including the money measurement concept, business entity concept, dual aspect concept, prudence concept, and objectivity concept. It also covers the qualitative characteristics of financial reports, such as understandability, relevance, comparability, and reliability. The report concludes that accounting is crucial for businesses to keep track of their operations and that financial reporting must be understandable, relevant, comparable, and reliable.

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accounting for business

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Discussion of five accounting concepts that are used to prepare financial statements................1
Discussion of qualitative characteristics of financial reports that make information useful to
users of financial reports..............................................................................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
In business, accounting is said to organised recording, examining, interpreting addition to
presenting financial information (Bebbington and Unerman, 2018). Accounting plays crucial
function in running an international business as it assists managers to track income as well as
expenditures, provide stakeholders with quantitative financial information and ensure statutory
compliance. The report highlights five accounting concepts which are used by corporates in
preparing financial statements. Further, it also discusses qualitative features of financial reports
which makes information useful to users.
MAIN BODY
Discussion of five accounting concepts that are used to prepare financial statements
Accounting concepts refers to set of general conventions which are utilised in businesses
as guidelines to manage accounting situations. Major purpose of accounting concepts in a
business is to maintain consistency together with uniformity in accounting records. Within a
business, accounting concepts are applied at the time of recording economic events addition to
preparing financial statements which is essential for all accountants to abide. Some accounting
concepts that are used by companies to prepare financial statements are as discussed:
Money measurement concept: As per the concept, all recorded transaction and events are
measured in terms of money that is local currency monetary measure unit. It takes money as
common parameter to measure organisational performance (Seehausen, 2021). The concept
guides accountants to records only those events or transactions in financial statement that could
be expressed in monetary value. It eases communication among business management and
stakeholders through presenting values in monetary terms. For example, product durability,
employee skill level, in-house brand value and expected resale value of patent are some items
which are not recorded in financial statement as they cannot be expressed in money terms.
Business entity concept: The concept says that all transactions related to business are
separately recorded from those of owners along with other businesses. While preparing financial
statement, corporate and its owners are treated as separate and distinct. For instance, owner of an
entity personally acquires office building as well as rent spaces in company at 4100 £ per month.
As per the concept, rent expenditure is recorded in financial statements as valid expense to entity
and taxable income to owner.
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Dual aspect concept: As per the concept, all transaction of business requires recordation
in two distinct accounts. It assumes that all transactions have dual effects that includes it affects
two accounts in respective opposite sides that reflects that each transaction is recorded at two
places. For example, purchase of motor car in cash leads to increase in one asset that is motor car
and decrease in another that is cash. In financial statements, repayment of loan causes decrease
in liability that is loan and decrease in asset that is cash or bank.
Prudence concept: It says that a financial statements of business must err on side of
caution (Cannon, 2019). In other words, it states that a company should never overestimate its
assets, profits and revenue, rather it should not underestimate its expenses, losses along with
liabilities. For example, provision of bad debts is recorded in receivable side of current assets
and deducted from end figure of receivable or debtors. Using the concept, an organisation
enhances trustworthiness of figures which are recorded in financial statement.
Objectivity concept: The concept says that organisational financial statement is based on
solid evidence. When accountant of business is preparing financial statements, they must make
attempts for using data that are objective together with reliable in nature. For example, business
purchase an equipment of 150000 £. At the time when company ask for demand and receive
equipment, it should receive bill memo. While making payment, it must receive a receipt. These
bill memo and receipt provides proof of transaction.
Discussion of qualitative characteristics of financial reports that make information useful to users
of financial reports
Corporate financial statement is a mechanism which provides variant accounting methods to
showcase operating data as well as reporting debits along with credit according to accounting
concepts. Key corporate financial statement are income statement, balance sheet, cash flow
statement and statement of changes in equity (Apriliana and Agustina, 2017). These are used for
providing information about outcomes of operations, cash flows addition to financial position of
a business. Further, these it makes information useful for users in making decision for resource
allocation. Characteristics of financial reports are discussed below:
Understandability: Information about data that is presented in corporate financial
reporting should be readily understandable to users of the statements. In other words,
information in financial statements is clearly presented with additional information supplied in
supporting footnotes as required to help in clarification.
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Relevance: All the information in corporate financial reporting must be relevant to
requirements of users as information plays great role in influencing economic decisions of users.
It often comprises reporting specifically relevant information whose misstatement or omission
might effects decision of users (Shreyes and Gowda, 2018).
Comparability: Corporate financial reporting which are comparable with another
accounts or consistent accounting standards applied throughout each accounting period enable
user’s development of insightful conclusions related to business performance over time. In other
words, financial statements should be comparable with financial information that is presented for
another accounting period to help users or accountant to determine trends in performance
together with financial position of reporting company.
Reliability: Corporate financial statement includes information that should be free of
bias, material error and must not mislead. All types of information must faithfully represent
transactions along with other events that reflect underlying element of transactions together with
prudently represent uncertainties as well as estimates by proper disclosures.
CONCLUSION
From the presented information, it can be concluded that accounting for business is a way to
keep track of all operations of a company. Accounting is a discipline to record financial
transactions that are associated to a company. Major accounting concepts used to prepare
statements related to finance are money measurement concept, business entity concept, dual
aspect concept, prudence concept and objectivity concept. Understandability, relevance,
comparability and reliability are essential qualitative features of corporate financial reporting.
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REFERENCES
Books and Journals:
Bebbington, J. and Unerman, J., 2018. Achieving the United Nations Sustainable Development
Goals: an enabling role for accounting research. Accounting, Auditing & Accountability
Journal.
Seehausen, J., 2021. Accounting Concepts in Company Law. European Company and Financial
Law Review, 18(3), pp.398-427.
Cannon, M. L., 2019. An Exploration of Key Accounting Concepts Through Case Studies.
Apriliana, S. and Agustina, L., 2017. The analysis of fraudulent financial reporting determinant
through fraud pentagon approach. Jurnal Dinamika Akuntansi, 9(2), pp.154-165.
Shreyes, N. R. and Gowda, K. N., 2018. An empirical study of value relevance of financial
reporting in UK corporate sector. IUP Journal of Accounting Research & Audit
Practices, 17(2), pp.7-21.
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