Accounting Concepts and Qualitative Characteristics of Financial Reports

This report discusses the five accounting concepts used to prepare financial statements, including accounting period concept, matching concept, realization concept, accrual concept, and money measurement concept. It also describes the qualitative characteristics of financial reports useful to the users, such as faithful representation, relevance, conservatism, materiality, and comparability.

Accounting for Business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Determination of 5 accounting concepts along with their examples, used to prepare financial
statements....................................................................................................................................1
TASK 2............................................................................................................................................3
Describing the qualitative characteristics of financial reports useful to the users. ....................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business accounting refers to the identifying, analyzing, recording, interpreting and
communicating the economic events of a company for preparing financial statements. The study
will have deep insight on five accounting concepts used for preparing financial statement.
Subsequently, the report also overlooks inside the qualitative characteristics required.
TASK 1
Determination of five accounting concepts along with their examples, used to prepare financial
statements.
Accounting period concept:
Every business incorporates for foreseeable period so they also want to know about their
growth. Accounting concept helps the entity to know the performance frequently as accounting is a
continuous process and prepared on interval basis. However, financial period chosen shouldn't be
too long or too short for such purpose (Saputra and Anggiriawan, 2021). Further, at this accounting
date accountants prepare balance sheet, statement of change in equity, income and cash flow, etc.
Therefore, they conclude the financial position and stability of company on interval basis. For
example, Diageo plc wants to know their position in market on regular intervals. Therefore, for this
they can prepare financial statements from 1st January to 31st December or from 1st April to 31st
March according to their will on accounting date mentioned
Matching concept:
In the stated concept, it defines the importance of bringing cost and revenue of same
accounting period together. Therefore, if the financial period of cost and revenue doesn't match they
will not give the appropriate profit for that tenure. Moreover, they follow accrual accounting method
during the time of recording. Hence, the entity will record its cost and revenue as and when actually
incurred rather than the payment is received by them. The entry of transaction of incomes and
expenses are made simultaneously as they follow cause and effect relationship. For example,
Morrison’s at stated date 21st November 2019 purchased inventory in bulk from distributor on
credit, worth of £1000. The payment will be done by the company on 21st May 2020 and the follow
the accounting period of 1st April to 31st March. Therefore, according to this concept the transaction
will be recorded on 21st November 2019 only.
Realization concept:
Realization concept is also known as revenue recognition concept. According to this
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principle the revenue earned is entered in the books of accounts as and when they are realized.
Moreover, they will not consider the transaction recorded if the entry is made without sale of goods
and services (Shkulipa, 2021). Hence, they also help in preventing the business from fluctuation of
surplus by recording sales and incomes as they occurred. For example, Advance payment of £1000
received by Waitrose on promise to sell goods worth £5000. Therefore, according to this concept the
transaction will be entered at the time of advance payment received.
Accrual concept:
Under accrual basis of accounting, incomes and expenses must be record in the particular
period in which it is earned. Therefore, the principle of this concept describes the obligation to
record the recognized income as soon as it occurs and not when received. Moreover, this study is
similar to the Matching concept as the accrual based accounting ensures revenue is matched with its
expenses to generate accurate profit. For example, Sainsbury company has incurred salary to the
employees for the year. Moreover, on the accrual basis concept they also have recorded in the books
of accounts but payment is yet to be made.
Money measurement concept:
Only business transactions that can be expressed in money terms are recorded in the books
of accounts. Therefore, non-monetary nature items are ignored irrespective of their urgency.
Further, it provides benefit of recording data with common denominator i.e., in quantities which
make it easier during taking decision. For example, sales of the company go down due to the strike
of employees.
TASK 2
Describing the qualitative characteristics of financial reports useful to the users.
Qualitative characteristics are the traits that makes the financial reports more viable and easy
to understand by its informants. This includes many characteristics that are mentioned below: Faithful representation: Financial report prepared need not only be relevant and reliable to
the users but also it ought to trustworthy, free from biasness and incorrective information.
The statements should disclose complete and neutral data of economic scenario as the
decision-making depends on this. Relevance: Financial statement ought to prepare in such a manner which will be beneficial
to the users and help them in making economical decisions. Further, in this predictive value
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and confirmatory value help the users to make different opinions (Qualitative characteristics
of accounting information 2021). Moreover, prediction point is useful to the shareholders
who need to Forecast certain things related to future. Whereas, confirmatory point validates
the prior expectations and correct them with change in decision if needed. Conservatism: According to the standards organization need to prepare themselves from all
the financial crunches with prudence principle of estimating the losses rather than profit.
Moreover, it helps company in drafting report deliberately so that decisions can be taken by
users accurately. Materiality: This characteristic ensure that accounting reports are free form the burden of
unnecessary transactions that makes them hard to read and understand. Hence, financial data
communicates only material information and omits immaterial facts. Moreover, the details
included must influence the economic decision of the users.
 Comparability: Financial report made must be in a comparable state so that it becomes easy
for the users to understand the content involved in effortless manner. Therefore, the methods
used in various places like calculating depreciation, formulating profits, etc., should be
constant (Tran, Nguyen and Hoang, 2021). Along with the same procedure they can
represent data in ratio form to make quantitative aspect in differentiating state.
CONCLUSION
By summing up this report, it has been articulated that the investors uses this standards at
global level. This case depicts that if organization prepare their financial statements following the
concepts and qualitative traits they can highlight the report. Therefore, becomes easy to approach by
users to understand and take decision on crucial areas.
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REFERENCES
Books and Journals
Saputra, K. A. K. and Anggiriawan, P. B., 2021. Accounting, Auditing And Corruption In
Kautilya’s Arthasastra Perspective And Psychogenetic Hindu: A Theoritical Review. South East
Asia Journal of Contemporary Business, Economics and Law. 24(2). pp. 67-72.
Shkulipa, L., 2021. Analysis of Impact of Changes in IFRSs on Convergence of Accounting
Systems in World. Studia Universitatis Vasile Goldiş, Arad-Seria Ştiinţe Economice. 31(3). pp.
75-103.
Tran, Y. T., Nguyen, N. P. and Hoang, T. C., 2021. The role of accountability in determining the
relationship between financial reporting quality and the performance of public organizations:
Evidence from Vietnam. Journal of Accounting and Public Policy. 40(1). p. 106801.
Online
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