Accounting Concepts: Importance and Description

Accounting concepts

Table of Contents
INTRODUCTION ..........................................................................................................................3
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Accounting concepts are used in calculating, recording, describing and gathering the data
transaction in respects of financial statements (Zeff., 2018). It create a systematic and acceptable
framework that helps the investor to analyse the position and growth of the company. Business
entity concepts, Money measurement concept, going concern concept, accounting cost concepts,
accounting period concepts and dual aspect concepts are concepts of accounting. The importance
of the accounting concepts are maintaining regularity and consistency in accounting
transactions(Alam and Hoque 2021). These concepts are created many year before that's why
they are accepted universally. In below research, the concepts of accounting are describe in
relation to preparation of financial statement. They described six accounting concepts are as
follows:
Business Entity Concept is the first concept that assume and differentiate the two entity,
the company and its owner separately. In Simple word, the business treated both the entity are
apart at the time of recording transactions. The company or enterprise are determine as an
artificial person means all the transaction are related to business are recording in the books of a
particular company (Sava., 2018). In the books of accounts only those transactions are recorded
which are related to the company income or expenditure and not the activity related to the
entrepreneur or owner of the business. For example: Assume that Mr. X started a company and
invest £ 200000. He purchased goods for £ 80000, Computers for £ 40000 and Land and
machinery of £ 60000. Cash in hand remain of £ 20000 only then the owner withdraw £ 10000
cash or goods amounting £ 10000 for his personnel use. According to the business entity concept
the started investment of £ 200000 is called capital i.e. a liability of a business towards the
business owner and the domestic withdrawal of cash and goods of £ 10000 each from the
company assets are treated as drawings (Bandy., 2018). This example explain the difference of
two entity and its treatment in financial statement.
Money Measurement Concept is second approach of accounting concept which assume
that all the transactions are related to company need to be in terms of money or also assure that
money is in form of currency of a same country. In UK all these transactions are in terms of
pound (£ ). In this accounting concept only those income are expenditure are recorded in the
books of accounts that are in the form of money (Staubus., 2021). It is easy to understand and
calculate because all the activity are noted by company in monetary term. This concept also