Accounting for Business: Concepts and Qualitative Characteristics of Financial Reports

This report covers accounting concepts such as dual aspect concept, realization concept, accrual concept, cost concept, and matching concept. It also analyzes the qualitative characteristics of financial reports for users, including understandability, comparability, relevance, and faithful representation. The report concludes that accounting is important for managing business transactions and provides guidelines for recording business entries.

ACCOUNTING FOR
BUSINESS
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
(a) Accounting concepts that use in the preparation of financial statements..............................3
(b) Qualitative characteristic of financial reports for users........................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

·INTRODUCTION
Accounting refers to language of the business in which all the business transactions are
recorded, summarized, analysed in term of money in books of accounts. This report will cover
accounting concepts which are used as assumption, guidelines for recording financial
transaction. These concepts are dual aspect concept, cost concept, realization concept, accrual
concept etc. which provide faithful information to user (Birt, Muthusamy and Bir, 2017).
Further, this report will analysis qualitative characteristic or importance of financial report from
users point of view. Internal and external user of the company can take decision on the basis
financial report.
·MAIN BODY
·(a) Accounting concepts that use in the preparation of financial statements
Accounting concepts are principles, rules, assumptions on which all the business transaction are
recorded.
Dual aspect concept
Double entry book keeping is the foundation of dual aspect concept and whole
accounting is based on this concept. This concept states that every business transaction has dual
aspect one is on debit side and other is on credit side. Therefore, each business transaction must
record at two places in books of accounts. For example: a business purchases machinery by
cheque. This transaction has dual aspect one is on debit side as assets increase and other is on
credit side where bank balance reduces.
Realization concept
Realisation concept refers to revenue should be recorded only when it has been earned
irrespective of payment received or not. This concept is derived from revenue recognition
principles. Majorly this concept is applied when goods and services are delivered on advance
cash basis or credit basis (Christensen, Newberry and Potter, 2019). So in simple words
company records profit only after it is actually earned. For instance: a company get an advance
payment of 6000 p.a. for its future services. So company does not realize 6000 as revenue until it
has performed services. Company records 6000 as liability at initial. Further, As services will be
delivered on monthly basis as amount of 500 per month will transfer to revenue account.

Accrual concept
Accrual concept refers to, As business transactions occur it needs to be recorded in the
books of accounts even if payment for the goods and services has not been made or received.
Through this concept, a user can get true and fair picture of financial statements. This concept is
mostly used by the business who are dealing in credit transaction of goods and services. For
instance: a company sold goods on credit basis. This transaction is to be recorded on accrual
concept basis even if cash is received or not from customer. This need to be recorded as debtors
on assets side.
Cost concept
This concept states that all the assets are recorded in books of accounts on the basis of its
acquisition cost or historical cost not on the basis of its market value. Thus, this concept is also
known as historical cost concept where all fixed assets are recorded on book value. Business
record their assets on realizable amount only at the stage of winding up (Hanny and Rizal,
2020). Example: a company purchase land of 10,00000 for expansion in the year 2019. In 2021,
the value of land increased to 5000000. But company is preparing account statements on the
basis of cost concept that why land value still shows the amount 1000000 in the financial
statements.
Matching concept
Matching concept states that the expenses which are incurred to earn revenue must
belong to same accounting period. As company realized its revenue then the next step is to
allocate it on the basis of relevant accounting period. This allocation is done with the help of the
accrual concept. All Revenue and expenses which belong to same accounting period are to be
recorded in that period. This concept guides how revenue should be matched to its expenses to
determine profitability of a company (Melnyk, N. and et.al., 2020). Example: a company pays
20% commission on sales of 100000 and it is decided to pay this commission next year. As
matching concept states that this commission is recorded in current year accounting statement
because this expense is related to current year revenue.
l壱(b) Qualitative characteristic of financial reports for users
Understandability
A manager of company prepare financial statement on the basis of accounting concept,
conventions, equation etc. so that it presents clear picture of company to its user. Further,

manager also use supporting foot notes which help the user to get each and every information in
detail. For example manager recorded 50000 as liability and no other information is presented in
footnotes (Mohammad-Azari, Bozorg-Haddad and Biswas, 2021). This transaction create
confusion regarding the current liability and non current liability. So manager should prepare
complete and desirable financial statement.
Comparability
Whatever information is presented in the financial statement should be comparable on
period basis. If company uses different method or concepts etc. of recording transaction it states
clearly in the financial report. Thus, user can compare current period performance to past year
performance. In addition to, it is also prepared in systematic format so that user can analyse
financial report by comparing with peer companies. Example: company has changed inventory
valuation method from LIFO to Weighted average. Manager need to show this change in
financial report so that internal and external user can take their decision on the basis of financial
report.
Relevance
Financial report present all useful and relevant information which affect user decision. In
addition to, all these informations are taken from reliable sources. It helps user to analyse
company performance and build trust for long term. Example: company invested amount
1000000 in long term investments (Umar, H., Partahi and Purba, 2020). For presenting reliable
statement manager need to record this transaction with supporting foot notes. User take decision
on the basis of this information to invest in the company or not.
Faithful representation
Information should be free from material error, complete, free from biasses, verifiable in
the financial statement. It helps users to understand and analyse each micro and major factor of
the company. A desirable financial statement is those which can easily understand by ultimate
user. Faithful representation reduces the chance of fraud and also prepare foundation for long
term relationship. Example: whatever sales are recorded by company, should have invoice
attached to it.

·CONCLUSION
Conclusion has been drawn From the above analysis that accounting is important to manage all
the business transaction either it is related revenue or expense. This report analysed accounting
concepts with examples which are helpful in recording business transaction. In addition to, these
concepts also provide guidelines to manager to record business entries. At the end, this report
also studied qualitative characteristic of financial report and also analysed importance of these
statements from users point of view.

l壱REFERENCES
Books and Journals
Birt, J. L., Muthusamy, K. and Bir, P., 2017. XBRL and the qualitative characteristics of useful
financial information. Accounting Research Journal.
Christensen, M., Newberry, S. and Potter, B.N., 2019. Enabling global accounting change:
Epistemic communities and the creation of a ‘more business-like’public sector. Critical
Perspectives on Accounting. 58. pp.53-76.
Hanny, Y. R. and Rizal, N., 2020. Hidden Curriculum: The Concept of Integrating Islamic
Value in Higher Education Accounting at Muhammadiyah on Ulab Albab Perspective.
Jour of Adv Research in Dynamical & Control Systems. 12(1).
Melnyk, N. and et.al., 2020. Accounting trends in the modern world. Independent Journal of
Management & Production. 11(9). pp.2403-2416.
Mohammad-Azari, S., Bozorg-Haddad, O. and Biswas, A., 2021. Water accounting. In
Economical, Political, and Social Issues in Water Resources (pp. 1-28). Elsevier.
Umar, H., Partahi, D. and Purba, R.B., 2020. Fraud diamond analysis in detecting fraudulent
financial report. International Journal of Scientific and Technology Research. 9(3).
pp.6638-6646.
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