Six Accounting Concepts Used in the Preparation of Financial Statements

This article discusses six basic accounting concepts used in the preparation of financial statements, including going concern, realization, business entity, consistency, money measurement, and prudence. Examples are provided to illustrate the application of these concepts. The article also includes references to relevant books and journals.

Assessment

Contents
Contents...........................................................................................................................................2
Discuss six accounting concepts used in the preparation of financial statements. Use examples to
illustrate the application of these accounting concepts....................................................................1
REFERENCES................................................................................................................................4

Discuss six accounting concepts used in the preparation of financial
statements. Use examples to illustrate the application of these accounting
concepts.
The following are some basic accountancy concepts:
Going concern- It implies that the company covered by the fiscal reports would remain to
operate in the coming years (ABU-TAPANJEH and AL-SARAIRAH, 2021). The monetary
statements and Statement of Cash Flow are produced with the assumption that the company will
not be substantially reduced in scale or liquidated and thus the business will keep operating in the
big scheme of things without being too worried about the future which is uncertain in nature. A
big, purpose-built facility, for instance, offers significant worth to a going concern company;
nevertheless, if the manufacturer would have to be liquidated, it would probably have little usage
for those other sectors, resulting in a decreased marketplace price.
Realisation- This notion indicates that while property right (shareholdings in legislation)
moves among suppliers and buyers, the commercial activities are reported in the finance records.
That might or might not occur at the identical instant as payments. Credit purchases, for instance,
are documented whenever the purchase is completed (and property right transfers to the
purchaser), but the money is paid afterwards. Similarly, products for sales or returns are billed to
the consumer whenever they have been delivered, but they would be compensated for or
reclaimed afterwards.
Business entity- This alludes to the notion that accounting information, document and
reporting on a company's operations. They exclude the resources and obligations of those
involved in the ownership or operation of the company. Instance of it can be as a lone dealer's
financial possessions and obligations are maintained distinct from that of the firm, and individual
costs (such as a relative’s vacation) could not be reimbursed from the corporate banking
accounts. Investment and drawings are the most important ties among the firm and the founder's
individual finances (Burnett and Merchant, 2020).
Consistency- Whenever a company sets specific accountancy procedures, it must follow
them regularly. Instance of it can be said as a company which intends to establish a 10 % annual
allowance for amortization on equipment employing the straight line approach must apply that
proportion and technique in subsequent income proposition for this investment. In addition,

when one corporation has decided on a strategy, it is free to amend it if there are sufficient
grounds for that as well, and a comment to the accounting records should clarify why.
Straightforward analyses among accounting records from various years could be done using the
regularity principle. Other instances of the principle of uniformity include:
 Stock appraisal
 Safeguard for uncertain loans
 The transparency format's implementation
 Investment and earnings expenditures are treated differently.
Money measurement- It alludes to the notion that all company activities are recorded and
reported using cash as the unifying theme in the accountancy information process so that all the
aspects can have money value included in them and thus can be used and handled as and when
required and thus it is very beneficial for the firm in the long run as it clears all the factors and
thus reduces the chances of fraud and error in the working of the business. All economic
activities and occurrences should be converted to a quantity of physical money. An activity or
occurrence should not be documented in the accounting records if a credible numerical worth
cannot be assigned to it. For instance, since employee retention and excellence of products could
not be measured in monetary measures, they are not included in the Monetary Statement (Lepistö
and Ihantola, 2018).
Prudence- This idea entails exercising precaution while taking decisions in the face of
ambiguity. This implies that a reduction (reduced) income estimate and inventory value must be
stated if there is any question. Earnings must not be expected and can just be recorded once it is
fairly assured that it would be earned; at the very similar moment, all known obligations must be
covered (Oesterreich and Teuteberg, 2019). This must be emphasised that using the discretion
idea necessitates exercising precaution during and in the period of creating estimations, since
resources must not be overestimated whereas obligations and expenditures ought not to be
underestimated. Instances of how to apply the discretion notion include:
 Deferred revenue of costs and revenues, when the quantity is estimated
 Principal payments of costs and revenues, in which the sum is estimated
 Stock appraisal
 Non-current resources devaluation
 Insolvent loans are cancelled off.

 Settlement for uncertain loans

REFERENCES
Books and journals
ABU-TAPANJEH, A.M. and AL-SARAIRAH, T.M.K., 2021. The Availability of Forensic
Accounting Application Factors to Enhance the Auditors Efficiency in Jordan. The
Journal of Asian Finance, Economics and Business, 8(3), pp.807-819.
Burnett, C. and Merchant, G., 2020. Literacy-as-event: Accounting for relationality in literacy
research. Discourse: Studies in the cultural politics of education, 41(1), pp.45-56.
Lepistö, L. and Ihantola, E.M., 2018. Understanding the recruitment and selection processes of
management accountants. Qualitative Research in Accounting & Management.
Oesterreich, T.D. and Teuteberg, F., 2019. The role of business analytics in the controllers and
management accountants’ competence profiles. Journal of accounting & organizational
change.