Accounting Concepts Used in Preparation of Financial Statements

Accounting concepts

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Accounting concepts used in preparation of financial statements...............................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................1

INTRODUCTION
Accounting concepts are the set of rules, conditions and assumptions that explains the
factors and controls following which accounting functions. These concepts ensure uniformity in
the preparation and maintenance of financial statements. Accounting concepts are useful in
assisting the accountants with recording of business transactions. This report will explain six
accounting concepts that are used in the preparation of accounting statements.
MAIN BODY
Accounting concepts used in preparation of financial statements
Money Measurement Concept: According to the accounting concept of money
measurement only those transactions that can be expressed in the monetary terms are recorded in
the books of accounts. As per this concept it is assumed that all transactions of a business entity
can be expressed in the financial terms (Aboutorabi and et.al., 2022). This concept also
represents the limitation of accounting that non-financial transactions cannot be accounted
during accounting for an organization. For instance, the transactions like purchase of raw
materials worth £20000, a sale of £5000, rent of £2500 paid, £10000 received from debtors, etc.
are all transactions that are capable of being expressed in money terms and hence can be
recorded in the books of concerned party. But transactions like increasing loyal of employees,
enhancement in the work culture of the organization, etc. are the transactions that cannot be
represented in money terms for their recording.
Historic cost concept: The historic cost concept of accounting states that all the assets
that belong to an organization are recorded at their historic cost, that is their purchase price or the
price at which the firm acquired the assets (Accounting Concepts Used for the Preparation of
Financial Statements, 2021). Recording of assets at their current price is argued to give more fair
and accurate picture of the financial position of the company but there are various limitations
associated with it, so it is recommended to record the assets at the historic price for avoiding
limitations. For example, ABC limited, a cloth manufacturing company purchase a machinery
for £500,000. £2320 spent on the transportation of the machine and £1525 were spent by the
company on the installation of the asset. So the amount that will be recorded in the books of
accounts for the machinery will be £500,000 + £2320 + £1525 = £503,845, that is the total cost
company paid for the machine. This is called the historic cost of the asset. Original cost of an
asset is the historic cost less the depreciation amount (Bailey and Samuels, 2018). This concept