Accounting Concepts and Qualitative Characteristics of Financial Reports

This essay covers the topic of accounting concept with practical application along with characteristics in the context of concerned users. It discusses major accounting concepts such as accrual, consistency, conservatism, accounting equation, and accounting period. It also explains the qualitative characteristics of financial reports such as understandability, comparability, reliability, relevance, and faithful representation.

ESSAY

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Accounting concepts....................................................................................................................3
Qualitative characteristics of financial reports............................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................1

INTRODUCTION
Accounting concepts are the base and fundamental which every company must need to
consider so that the efficient operation and recording of financial transactions would be possible.
Likewise, preparation of financial reports and its use in the context of the user will lead to better
under-stability and decision-making. This essay will cover the topic of accounting concept with
practical application along with characteristics in the context of concerned users.
MAIN BODY
Accounting concepts
These are the basic assumptions and rules and principles which are kept to be considered
while recording business transactions and preparation of financial accounts.
The major accounting concepts are:
Accrual concept:
It is one of the major accounting concept which states that income should match with the
revenue. It is also known as matching concept. This concept is mainly concerned with the
recording of revenue and expenses with the occurrence of transactions irrespective of fact that
the payment is received or not (Barker and Teixeira, 2018). As it is a matching concept which
always work on the fact that revenue and expenses must be recognized in the concerned period.
For example suppose company ABC limited sell some goods on 20, march and allow the
customer to make payment after 20 days. And in this case suppose if the customer is a good one
then it will make payment on due date and even before that. In this case, ABC will record
income in March itself because of raise in sales with a corresponding increase in debtors. This is
called accrual and matching concept.
Consistency:
This is also a major accounting concept which direct and assist the companies to be
consistent with the following of same accounting method. As per this principle if a company
chooses one accounting method for the preparation of its financial accounts then it must be stick
to it (Wang, 2018). This need to be consistently followed so that the making of comparison with
regard to financial statements and performance would be easy. The best example would be the
following of method of depreciation towards fixed assets that could either be written down value

method or straight line method. This means any of the above method must be consistently
followed without making any change in it.
Conservatism:
As per this concept revenue and expenses must be recognized and treated differently.
This means that business will recognize revenue only when there are chances to earn (Hsieh, Ma
and Novoselov, 2019). For example signed invoices and received purchase order. However,
expenses are recognized and recorded as soon as business find that there are any chance of being
its occurrence. This means business follows over estimation of expenses rather than income.
Accounting equation:
This is also a major accounting concept on which the companies and business make
preparation of their financial statement. As per this concept every company's assets will always
be equal to the sum of liabilities and equities. As per this equation assets are always on debit side
and must always be debited in ledger account too. For example on receiving cash it will always
be debited in accounting software. While liabilities and equities will always be credited. For
example on issuing of shares, amount will always be credited to owner's equity.
Accounting period:
It is also an important concept that assist the companies to make preparation of financial
accounts at the end of financial year or accounting year. This will lead to making consistent flow
of business because with the preparation of accounts companies can itself determine their
financial performance. The best example is the preparation of financial accounts at the end of
financial year.
Qualitative characteristics of financial reports
Financial reports are the statements which make formal recording of financial
transactions and activities. It will lead to the creation of understanding regarding the financial
health of the company.
There are various users in association with the financial reports. These users may
includes internal as well as external. Internal users are managers, owners and employees. While
external users may includes suppliers, banks, customers, investors and various others.
Characteristics:

Understandability is the main characteristics in association with the financial reports that
the contained information must be clearly visible and presented in the financial statements that
will be easily understandable to users (Qualitative characteristics of financial statements, 2021).
Also, additional information is also presented with the financial reports in the footnote section so
that any user can make easy understanding.
In the same manner Comparability is also an important characteristic of financial
statement that they are comparable with the inclusion of relevant accounting transactions. This is
also a reflection of the consistency concept which shows that accounting methods with regard to
company must be consistent so that the comparability would be possible in the context of
financial reports (Herath and Albarqi, 2017). This will enable the user to make comparison of the
financial statements and accordingly make analysis with regard to financial health. Likewise,
financial statements are always reliable because they are free from material errors and biasses.
All the information must be a representation of concerned transactions and events. This will also
indicate the following of prudence concept which assist the companies to include all the
information must be error free and correct. This will also be helpful for user because on this basis
they can make financial decision.
On the same way only those informations must be a part of the financial reports which
must be relevant so that the concerned user would be able to grab the required knowledge
regarding the company (Unerman, Bebbington and O’dwyer, 2018). As every company follows
the accounting concept of materiality under all the material and important information must be
included with regard to the organization. This will lead to better decision-making. It is also to be
noted that Financial statements are the true reflection of the company's financial health and
performance. This means that with the analysis of the financial health with regard to company
can be easy to the concerned users.
CONCLUSION
From the above essay it can be concluded that an implication of the accounting concept
with respect to company will lead to have better preparation of financial reports. Likewise, it is
also summarized that the financial reports also plays a major role in association with its users
with regard to determination of financial health and performance.

REFERENCES
Books and journals
Barker, R. and Teixeira, A., 2018. Gaps in the IFRS conceptual framework. Accounting in
Europe. 15(2). pp.153-166.
Herath, S.K. and Albarqi, N., 2017. Financial reporting quality: A literature review. International
Journal of Business Management and Commerce. 2(2). pp.1-14.
Hsieh, C.C., Ma, Z. and Novoselov, K.E., 2019. Accounting conservatism, business strategy, and
ambiguity. Accounting, Organizations and Society. 74. pp.41-55.
Unerman, J., Bebbington, J. and O’dwyer, B., 2018. Corporate reporting and accounting for
externalities. Accounting and Business Research. 48(5). pp.497-522.
Wang, J., 2018. Essays on Accounting Consistency (Doctoral dissertation, Queen's University
(Canada)).
Online references
Qualitative characteristics of financial statements., 2021. [Online]. Available through
<https://www.accountingtools.com/articles/what-are-the-qualitative-characteristics-of-
financial-statem.html>

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