Six Accounting Concepts Used in Financial Statements Preparation

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

Accounting concepts

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 a few basic accountancy guidelines:
Cost- Resources and liabilities are presented in the financial statements at their historical
worth that is the costing of the business (ABU-TAPANJEH and AL-SARAIRAH, 2021). The
benefit would be that the estimations in the Statement of Financial Position are objective;
therefore there can be no argument about the statistics given. However, past valuation
evaluations become out-of-date over time, and most companies employ a regular resource
reappraisal technique. For example, unorganized land and structures bought two decades ago will
be valued far more now than it was at date of acquisition, necessitating periodic reassessments.
Accruals- The balancing of income and spending for items and services over time is referred
to as accruals. The income report shows how much cash was paid and how much cash was
potentially recovered. Income and spending accounting takes this approach rather than
evaluating receipts and payments since they are received and paid. The accompanying examples
demonstrate the accruals concept in accounting:
 Liabilities that are bankrupt were cancelled.
 Defend against unknown obligations
 Securities opening and closing times have been changed.
 Trade payable
 Trade receivable
 Depreciation of non-current assets
Going concern- The term "going concern" denotes that perhaps the company reflected by the
income declaration would remain to operate efficiently and effectively. The fiscal statements and
liquidity ratios are created on the assumption that the company will not be drastically reduced in
scale or liquidated, and therefore it will remain to function in the long run without being unduly
anxious about the uncertain position (Burnett and Merchant, 2020). A huge, purpose-built
structure, for instance, offers significant importance in a going concern industry; yet, if the
production were to cease, it would probably have little utility in other sectors, resulting in a
reduced market valuation.

Consistency- If a company creates accurate accountancy procedures, it must follow them
continuously. For instance, a company that employs the straight line technique to set a 10%
annual allocation for equipment depreciation and amortization must apply this proportion and
methodology in potential income proposals for this expense. Moreover, once a firm has decided
on a strategy, it is permitted considering new ideas it if there are valid grounds, which should be
explained in a remark to the income accounts. Simpler income report analyses from several
variables could be done using the consistent idea. Other instances of the principle of uniformity
include:
 The declaration type's registration
 Investing and earning costs are managed separately.
 Stock assessment
 A safeguard for bad loans
Realisation- Constitutional liberty (statutory governing stakes) transfer among businesses
and buyers, while commercial transactions are documented in accounting records. It might occur
at the similar moment as activities or otherwise. Credit deals, for instance, are documented when
the deal is completed (and the purchaser receives possession and control), but the money is paid
much afterwards. Similarly, after products for sale or trade are delivered, they are billed to the
client, but they are later repaid or reclaimed (Lepistö and Ihantola, 2018).
Business entity- A body corporation is a collection of accounting data, documentation, and
managerial monitoring for a company. They do not comprise the holdings and debts of those
involved in the administration or operation of the company. Individual expenditures (such as a
relative's vacation) could not be covered using corporate borrowing facilities, and a solitary
manager's financial holdings and obligations are maintained distinct from that of the firm.
Investment and expenditures are by far the most important links among the firm and the
manager's monetary issues.
Money measurement- All actions and events documented in financial statements must be
transformed to a quantitative metric. If a realistic monetary value could not be given to an action
or event, it must not be recorded in financial statements. Moreover, any operational functions or
happenings that are not disclosed since they do not conform the outcome in very distinct
demands might have to be noted in supplemental explanatory comments to financial records to
assist viewers gain a more complete understanding of the company's financial condition and

position. As a result, accountancy data experts are unable to obtain a precise amount to be
acknowledged in financial statements in a lot of instances and must depend on reasonable
estimates to arrive at an anticipated figure (Oesterreich and Teuteberg, 2019). Appropriate
forecasts are used in the preparation of financial statements, and they do not compromise the
reliability of financial information as long as they do not include a considerable degree of
integrity and uncertainty. Where a significant portion of financial statements is not
acknowledged owing to an inability to estimate its financial effect with sufficient certainty, it can
be disclosed in the papers that accompany financial statements to increase the understanding and
completeness of the accountancy information presented. Employee satisfaction and product
excellence, for instance, are not addressed in the income statement since they are not statistically
quantifiable.
Duality- It relates to the notion that each and every financial transaction is recorded
employing 2 competing but identical accounts (debit and credit). Consider double-entry
bookkeeping. Thus it is very important as well as crucial to record an event or an activity in an
appropriate manner as it have an immediate consequence and it also reflects the same in the other
part of the accounting reports and thus it is very essential for the management to prepare the
documents keeping it in mind so that it can add value to the firm in the long term scenario
(Zhong and Fan, 2021).

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.
Zhong, M. and Fan, T., 2021, March. Research on the Integration of Corporate Financial
Accounting and Management Accounting under Big Data and Block Chain. In Journal
of Physics: Conference Series (Vol. 1827, No. 1, p. 012202). IOP Publishing.