Accounting for Business: Concepts and Qualitative Characteristics of Financial Reports

This report discusses the five accounting concepts that need to be used in preparation of financial statements and the qualitative characteristics of financial reports that make information useful for users. It covers understandability, relevance, reliability, comparability, and timeliness. The subject is Accounting for Business, and the course code and college/university are not mentioned.

ACCOUNTING FOR
BUSINESS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
A) Five accounting concepts that has been used in preparation of financial statement and its
example........................................................................................................................................1
B) Qualitative characteristics of financial report that helps in making information more useful
for user of financial report...........................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................6

INTRODUCTION
Business accounting can be term as systematic recording, analysing, interpreting and
presenting all necessary information of the company to interested stakeholders so that they can
take right decision. Thereby, accounting is procedure of keeping the track of various operation
that are perform in the company during the year, so that alternative method that can be decided
to achieve end objectives in more effective manner. This report has included crucial information
related to five accounting concepts that need to be used in preparation of financial statement.
Along with it, the report has discussed about qualitative characteristic of financial report so that
it can be useful for the other users or interested individuals.
MAIN BODY
A) Five accounting concepts that has been used in preparation of financial statement and its
example
Accounting concepts and convention can be define as set of rules and regulation or
principles that are used in preparation of financial statements by the company to effectively
represent necessary information to stakeholders (Thornton, 2018). Therefore, the five different
accounting concept that has to be used in preparation of financial statement by companies can be
illustrated in detailed as follows:
1. Accrual concepts: This is accounting concept that states revenue can be recognised only
when they have been earned, likewise the expenses can be recorded only if they have
been made by the company. Thus, the concept wants to emphasise that the recognised
revenue, profit and losses in amount can be different from actual cash received from
customers or paid to supplier or creditors. Such as the expense and revenue are recorded
in the financial statement in particular accounting year irrespective of whether they have
been paid or received in cash or not in particular accounting period (Watkins, 2020).
For examples: A organisation has sell its goods or products value £ 60000 on 20 march 2020
but the payment has not received by the company till 25 April 2020. So, as per the Accrual
concepts the transaction will be recorded on 31 march 2020, when sales have actually been
made. Likewise, firm has get raw material on 26 March 2020 but made payment on 5 April
2020 so in this case also the expense will be recorded on 31 March 2020.
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2. Going concern concept: It is another accounting concept that expect business will
continue its operation for foreseen future thus there is no intention to sell off its assets in
near circumstances or situation. So, as per going concern concept, the expense as well as
revenue may be recognised as deferred to a future period.
For examples: A particular organisation has made purchases of a machinery costing £100000
that has life span of 10 years. So, as per the going concept, some amount will be recorded as
expenses and the remaining amount as asset. So, only part of value i.e. depreciation or expense
related to machinery, will be charged to particular year and the remaining balance will be
recorded as asset at end.
3. Matching concept: It is the accounting concept that specify both the revenue as well as
expenses that has been incurred in order to earn revenue must be related to same
accounting period (Seehausen, 2021). Thereby, as per the matching concept once the
revenue has been realised then it will be accounted to relevant period.
For example: An independent distributor through selling products to customers gets 10%
commission. So, in October it makes the sales of £10000, but the commission amount has been
paid in November. Therefore, as per the principle $1,000 commission needs to be record in the
November statement along with sales of £10,000.
4. Cost concept: It is a concept that specified that the main purpose of accounting is
making records of all the transactions at their monetary cost of acquisition or price at
which they have been purchased by the organisation.
For example: The fixed assets such as plant, machinery and building purchase are
recorded in the books of accounts at price they have been purchase by the individual.
Likewise, a particular machine has been purchase at Rs 800000. But presently the
market value of machine is around 550000 so as per the historical cost concept it will be
not recorded.
5. Dual Aspect Concept: It is another accounting concept which states that each
transaction has two aspects that is, it affects two accounts in their respective opposite
sides. So, dual aspects say that the transaction must be recorded at two place in books of
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accounts (Takpire, 2020). This concept can be easily expressed through making use of
fundamental accounting equation that is:
Assets = Liabilities + Capital
For example: A individuals make purchase of furniture and other machine for business
at 500000 thus it will have two impact, firstly it will increase the overall assets of the
business by the same amount (500000). Secondly, the capital of company will be
decrease as it has been used in purchasing the furniture and other machine.
B) Qualitative characteristics of financial report that helps in making information more useful
for user of financial report
Financial statement contain useful information related to quantity and quality of financial
position, profit and market share of company that helps stakeholders in taking appropriate
decision. Reliability, relevance, timeliness, comparability and understandability are some of the
qualitative character of financial statement that help in making information useful which can be
represented in complete detail as follows:
 Understandability: The first and foremost qualitative characteristic that needs to be
present in financial report can be stated as, that it should be easily understand by the
users without much confusion or problem. So, it means that the financial information
must be clearly represented or organised in effective manner along with the additional
information, if any. Footnote and appendix can also be used as supporting evidence for
better understanding (Albritton, 2020). Furthermore, the information in statement should
be more clear, specific and legible and the manager should have considered both
statutory and voluntary information to be disclose in the financial statement effective
understanding by different interested users.
 Relevance: Second, characteristic that needs to be present in financial report to make it
useful is, it must be relevant to the needs and wants of the users. For examples:
stakeholders like investors, customers and owner or shareholder of company can more
conveniently make use of financial information of company to take necessary decision.
Moreover, it should include information such as predictive and confirmatory value i.e.,
past and future events that will helps in taking necessary decision by interested users for
benefits and growth of business (Senter, 2019). Therefore, it can be stated that relevance
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will contribute a lot in reporting all relevant information, so that unnecessary things can
be omitted.
 Reliability: Another thing that must be in financial report i.e., it should be more reliable
or others can easily trust them. Such as it must be free from error or mistake, biases, does
not mislead anyone and should be complete and prudent. In another words, information
related to each and every transaction must be faithfully represented, prudent needs to be
effectively represent estimates and properly disclosure of uncertainty. Along with it,
while making the financial records, individuals must ensure that judgement and
subjective information must be handle with appropriate care and competency. Thereby,
all the estimation that has been made are neutral that is free from chances of biases.
 Comparability: The four characteristic that should be in financial report is that, they can
be easily compared with previous financial year statements so that owner or any
interested individuals is able to analysis existing position and performance of the firm.
Comparability is one of the most important characteristic that needs to be maintained by
every organisation as it contributes in making sure that overall performance is measured
and monitor or compared on regular basis (Shukurullaevich, 2020). So that necessary
steps can be undertaken by manager to improve the firm performance for better results.
Therefore, it can be summarised that comparability characteristic helps in identifying,
plotting, patterning the recent trends and innovation present in the external environment.
Thus, it leads in taking effective decision for growth and expansion of business and
achievements of end goals.
 Timeliness: At last the financial statement or report must have characteristic of
timeliness i.e., should include all information in relevant or particular span of time.
Timeliness can be stated as how quickly an financial information of the company can be
available or used by the user for different purpose or to take right decision (McLeod,
2020). Thus, in order to adhere to the timeliness characteristic, the firm may have to
make use of more resources. So, all the necessary financial facts and figure related to the
company should be represented in the financial statement of the company in corrective
and effective manner.
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CONCLUSION
From the above report it can be concluded that there are different accounting concepts that
needs to be follow by the company while preparing the financial statement for better represent
and decision making in future circumstances. Moreover, it can also be summarized that five
Qualitative characteristics of financial report helps in making information more useful for user
of financial report. Therefore, at last it can be summarized that financial statement needs to
made in effective and appropriate manner through making use of accounting concepts so that
users can take right decision for their respective purpose.
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REFERENCES
Books and Journals
Albritton, J., 2020. Case Studies of Accounting Concepts and Principles.
McLeod, C., 2020. Financial Reporting Principles and Accounting Concepts: A Collection of
Case Studies.
Seehausen, J., 2021. Accounting Concepts in Company Law. European Company and Financial
Law Review, 18(3). pp.398-427.
Senter, B., 2019. Case Studies of Accounting Concepts and Methodologies.
Shukurullaevich, K. N., 2020. Qualitative Characteristics of Financial Reporting
Information. JournalNX, pp.464-468.
Takpire, M., 2020. Accounting Concepts and Conventions.
Thornton, S. C., 2018. A Collection of Case Studies on Financial Accounting Concepts.
Watkins, A., 2020. An Analysis of Case Studies Related to Financial Accounting Concepts and
Methods.
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