Accounting Concepts and Qualitative Characteristics of Financial Reports

ACCOUNTING

TABLE OF CONTENTS
TASKS...........................................................................................................................................................3
a) Accounting concepts used in the preparation of the financial statements and examples for its
application...............................................................................................................................................3
b) Qualitative characteristics of financial reports making information useful for the users....................4
REFERENCES................................................................................................................................................6

TASKS
a) Accounting concepts used in the preparation of the financial statements and examples for its
application
These are the essential concepts of accounting which are used in the preparation of the
financial statements:-
1) Matching concept: - The matching concept of accounting specifies that the revenues earned
and the expenses that are incurred to generate these revenues both are to be recorded in the same
accounting period. This is for applied in the business so that true and fair view of the profitability
can be assessed for the particular period. This shall be through matching the revenues and
expenses for that accounting period.
For example in case of the construction contracts in the business which are undertaken
for more than one year the expenses are being incurred on a continuous basis whereas on the
contrary the revenues are realized at the end of the year (Schmitz and Leoni, 2019). So on
proportionate basis with the expenditure the revenues are also to be booked in the accounts.
2) Duality aspect concept:- The dual aspect concept of accounting certifies that for every
transaction both the aspects should be recorded which are debit and the credit. The recording of
the dual effect that is in two different accounts shall be completing the double entry system of
accounting. This is one of the major reasons the trial balance and the balance sheet of the
company matches in the accounting as for every debit there is equal and opposite credit.
For example if the goods are sold for cash then in that case cash account shall be debited
due to the inflow of cash and the sales account shall be credited. This shows that for the
transaction two accounts are being affected one is the cash account and the other is the sales
account.
3) Business entity concept:- The business entity concept notifies that the business is separate
from the owners and the management that is operating it. As per the separate legal entity concept
the business shall be considered the artificial person which is eligible to enter into contracts,
purchase assets and owe various liabilities in its own name (Hilorme and et.al., 2019). It can also
sue and be sued in its own name. Also, the amount contributed by the owner in the form of
capital is considered as the liability and the withdrawal is considered as drawing.
For example the plant and machinery and the land and building can be purchased in the
own name of the business and is the sole owner and the members have no control over the same
in the business.
4) Accrual concept:- This concept simply signifies that the revenues are accrued when they
become receivable and the expenses are accrued when they become payable. The recording in
the books of account is to be made when the revenues and expenses are accrued in the company
even though they are not realized or being paid by the company.
For example the sales commission in respect of the sales that are executed in the period
are to be recorded as the expense in that period even though such commission shall be paid in the
next month.