Accounting for Business: Concepts and Qualitative Characteristics of Financial Reports

This report discusses the accounting concepts used in preparing financial statements, such as money measurement, business entity, dual aspect, accrual, and matching concepts. It also covers the qualitative characteristics of financial reports, including relevance, faithfulness, understandability, comparability, and reliability. The report explains how these characteristics are useful for decision-making from the user's point of view. The subject is Accounting for Business, and the course code, name, and college/university are not mentioned.

ACCOUNTING FOR
BUSINESS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
(a) accounting concepts used in preparation of financial statements..........................................3
(b) qualitative characteristic of financial report for user ............................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Accounting is a language of recording, analysing, presenting, interpreting business
transaction in terms of money. This report will highlight accounting concepts which are
foundation of preparing and interpreting accounting records. In addition to these concepts, it also
provides general guidelines, assumptions for preparation of financial statement. This report will
also cover qualitative characteristic of financial report and also analyse how it is useful in
decision-making from users point of view.
MAIN BODY
(a) accounting concepts used in preparation of financial statements
Accounting concepts define as rules, principles, assumptions etc. which help in recording
business transactions. These concepts are money measurement concept, business entity, dual
aspect concept, accrual concept etc.
Money measurement concept
Money measurement concept states that all the business transaction should be measured
in terms of money that is in the currency of country. All those business transaction which can not
be expressed in terms of money are not recorded in books of accounts. For example: a business
paid rent of 5000. This expense can be measured in terms of money that is why it is recorded in
the books of accounts.
Business entity concept
Business entity concept highlight that owner and its business are two separate entity. All
the business transactions are recorded separately in the books of firm. It helps in determining true
financial condition of business (Ulupui And et.al., 2020). For instance: owner of a business
purchase refrigerator for its personal use. This transaction is not recorded in the books of firm
because this expense is not related to business activity.
Dual aspect concept
Dual aspect concept is based on double entry system in which all transaction of business
are recorded in two separate accounts. In addition to dual aspect concept, each and every
transaction are recorded on dual effect basis i.e. one is on debit side and other is on credit side.

For example: a business purchases stock in cash. This transaction has two effect one is on debit
side as stock increase and another is on credit side as cash decrease.
Matching concept
All expenses which are incurred to earn revenue should be matched with same
accounting period. On the basis of this concept, exact profit and loss for the period can be
known. If there is no cause and effect relationship, then manager will record the cost to the
expense instantly (bt Ahmad, 2020). For example: a company purchases manufacturing plant.
This plant useful life is 10 years which means plant will manufacture products at least for 10
years into the future. According to matching concept cost of plant that is depreciation should be
matched with its revenue.
Accrual concept
Accrual means something that become due which is yet to be paid or received at the end
of accounting period. Accrual concept guides that all the expenses and revenue of business are
recorded as a transaction occurs irrespective of payment is received or made. This concept is
more appropriate in evaluating the financial health of company. Example: a business purchased
goods in December on credit basis (Kraten, 2018). Company has decided to pay this expense
next year. On the basis of accrual concept, this expense belong to current accounting period even
if it is paid or not. This expense need to record in books of accounts in current year accounting
period.
(b) qualitative characteristic of financial report for user
Financial report shows true and fair position of business. Ultimate user of financial report
can take decision on the basis of informations which has disclosed in these statements. Manager
should prepare financial report from users point of view.
Relevance
Financial report present all the relevant and useful information which influence economic
decision of users. Manager need to show supporting point as foot notes to explain transaction in
detail (Safkaur and et.al., 2019). All relevant information helps the user to analyse each factors
of company and also predict the future events. For instance: company takes loan from bank but

manager doesn't show any information regarding long term loan, short term loan. It creates
confusion for user while taking decision.
Faithfulness
Company can maintain long term relationship with users by providing complete
informations which are free from error. A manager prepares financial statements after analysing
all business transaction in detail so that exact true and fair position can be known. Company can
build up trust by providing faithful information. Thus, it also reduces the chance of fraud.
Example: an audited financial statement of the company can get trust of users for long term
investments.
Understandability
All the transaction and business events are presented in the financial report in such a
manner i.e. easily understandable by user. Understandability means classification, presentation of
financial information concisely and clearly. Benefits of this information can be increased by
making it more comprehensive so that it helps final users while taking decision. Thus, it avoids
wrong interpretation of financial statements (Umar, Usman and Purba, 2018). A desirable
financial statement is that which can be understood by average person. Example: by showing all
the expenses in details, helps the user to analyse each micro and macro factor in detail with its
peer companies.
Comparability
Company prepare comparable financial statements in which user can compare current
performance to past year performance. To increase comparability, manager should consider not
only statutory information but also disclose voluntary informations. Example: change in
valuation of depreciation method, change in inventory valuation method etc. All these changes
need to be mentioned in the financial report so that it becomes easy to compare past performance
and also to peer companies.

Reliability
All the information which are provided in financial statement should be true and reliable.
Manager need to extract all the information from trustworthy and reliable source. Financial
statements must show true and fair position of the company and also help the user in decision-
making. Internal and external user want to invest or work with such a company who is
trustworthy (Quraini and Rimawati, 2018). Example: management disclose all the information in
financial report so that user build up trust on company management.
CONCLUSION
From the above analysis conclusion has been presented that accounting is necessary to
understand business profitability, liquidity, solvency etc. User can take decision by proper
analysing financial report. All business transaction is recorded on the basis of accounting
concepts. These concepts are matching concept, dual aspect concept, accrual concept, money
measurement concept etc. Thus, These concepts also provide general guidelines, rules for
recording business transaction. Further, qualitative characteristic of financial report also analysed
along with its benefit to user.

REFERENCES
Books and Journals
bt Ahmad, N. L., 2020. Developing ethical accounting students through incorporating islamic
ethics into accounting curriculum: the educators perspectives.
Kraten, M., 2018. Accounting for Sustainable Value. The CPA Journal. 88(7). pp.10-11.
Quraini, F. and Rimawati, Y., 2018. Determinan fraudulent financial reporting using fraud
pentagon analysis. Journal of Auditing, Finance, and Forensic Accounting. 6(2). pp.105-
114.
Safkaur, O. and et.al., 2019. The effect of quality financial reporting on good governance.
International Journal of Economics and Financial Issues. 9(3). p.277.
Ulupui, I. And et.al., 2020. Green accounting, material flow cost accounting and environmental
performance. Accounting. 6(5). pp.743-752.
Umar, H., Usman, S. and Purba, R.B., 2018. The influence of internal control and competence of
human resources on village fund management and the implications on the quality of village
financial reports. International Journal of Civil Engineering and Technology.9(7). pp.1523-
1531.
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