Six Accounting Concepts Used in the Preparation of Financial Statements

This article discusses the six fundamental accounting concepts used in the preparation of financial statements, including cost, accruals, going concern, consistency, money measurement, duality, and realization. Examples are provided to illustrate the application of these concepts. The article is relevant to Accounting for Business and includes references from various journals and books. Desklib offers solved assignments, essays, and dissertations for Accounting for Business.

Accounting for Business

Contents
Contents...........................................................................................................................................2
Discuss six accounting concepts used in the preparation of financial statements. Use examples to
illustrate the application of these accounting concepts....................................................................1
REFERENCES................................................................................................................................4

Discuss six accounting concepts used in the preparation of financial
statements. Use examples to illustrate the application of these accounting
concepts.
A few fundamental accounting principles that are very vital to understand and
comprehend are as follows:
Cost- The expense of the firm is reflected in the income accounts by the actual value of
assets and obligations (Bassani and Cattaneo, 2019). The advantage would be that the estimates
in the Report of Monetary Performance are impartial, thus the numbers provided cannot be
disputed. Previous assessment assessments, on the other hand, develop out-of-date over period,
and also most organisations use an asset reassessment method on a routine basis. Informal
property and buildings, for instance, would be worth substantially more today than they were
when purchased 20 years back, requiring frequent re-evaluations.
Accruals- Accruals are the process of offsetting revenue and consumption for goods and
activities throughout duration. The earnings statement details how much money was spent as
well as how much money may be reclaimed. Instead of examining receivables and payables as
they are collected and given, revenue and expenditure accountancy employs this technique. The
following instances show the notion of accruals in bookkeeping:
 Accounts payable
 Accounts receivables
 Protect the company from unforeseeable liabilities.
 The schedules for beginning and ending stocks have been altered.
 Non-current items amortization
 Insolvent obligations have been eliminated.
Going concern- It refers to the possibility that the business represented by the income
statement will continue to function smoothly and successfully in the long run. The income
reports and net working capital are calculated assuming that the business would neither be
severely decreased in capacity nor terminated, and that it would continue to operate in the big
scheme of things sans becoming overly concerned regarding the unforeseen condition
(Mukhametzyanov, Nugaev and Muhametzyanova, 2017). For example, a large, purpose-built
facility has substantial value in a going concern business; nevertheless, if manufacturing were to

stop, it might have minimal value in many other industries, leading to a lower commercial
capitalisation.
Consistency- If a corporation sets proper accounting methods; it should adhere to them
consistently. A corporation that uses the straight line approach of the depreciation to establish a
10% yearly commitment for asset maintenance and amortisation, for example, should use this
percentage and approach in prospective revenue estimates for this expenditure. Furthermore,
after a company has agreed on a method, it is allowed to explore innovative concepts provided
there really are legitimate reasons that must be indicated in a note to the financial statements.
The continuous notion can be used to perform easier revenue statement analysis involving
multiple factors. Additional examples of the consistency concept involve:
 The certification of the statement category
 The expenses of acquiring and earnings are handled simultaneously.
 Asset evaluation
 A protection against bad debts
Money measurement- Every operations and occurrences described in accounting records
should be translated into a quantifiable statistic. An activity or occurrence that cannot be
assigned a reasonable corporate worth should not be included in accounting records.
Furthermore, any functional areas or events which have been not revealed because they do not
comply with quite specific requirements may need to be mentioned in additional descriptive
remarks to monetary documents to help user develop a better comprehension of the corporation's
monetary situation and viewpoint (Серая and Слабая, 2016). As a consequence, in many cases,
accounting information professionals are still impossible to collect a specific quantity to be
recognised in accounting records and should rely on acceptable approximations to get at an
expected number. Adequate predictions are employed in the compilation of accounting records,
and they do not jeopardise the accuracy of monetary data if they do not contain a significant
amount of dishonesty and ambiguity. When a substantial chunk of accounting records is not
accepted due to an incapability to approximate its monetary consequences with enough surety, it
could be reported in the documents that complement accounting records to improve the
comprehension and thoroughness of the accounting and finance data described. Because worker
engagement and item quality are not quantitatively measurable, they are not included in the
financial disclosures.

Duality- It refers to the idea that each accounting entries is documented using two separate
but equal registers (debit and credit). Contemplate using double-entry accounting. Therefore, it is
critical to properly register an occurrence or action since it has an instant impact and represents
the similar in various parts of the financial reporting. Thus, it is critical for administration to
write papers with this in consideration so that it may provide benefit to the company in the
longer phrase (Herawati, Dewi. and Dewi, 2020).
Realisation- When financial agreements are recorded in financial statements, legal freedom
(mandatory controlling interests) transfers between enterprises and customers. It could happen at
the same time as events or at a different time. Credit purchases, for example, are recorded once
the transaction is finished (and the buyer has ownership and authority), but the cash is not paid
until long later. Likewise, things supplied for resale or exchanges are invoiced to the customer,
but they are subsequently refunded or recovered.
Business entity- It is a compilation of accountancy information, records, and administrative
oversight for a firm. They does not include the assets and liabilities of individuals participating in
the firm's management or functioning. Personal expenses (including a friend's trip) are not paid
by company financing, and a single owner's monetary assets and liabilities are kept separate from
those of the company. The most crucial ties between the company's and the owner's financial
concerns are investing and spending (Sudacevschi, 2016).

REFERENCES
Books and journals
Bassani, G. and Cattaneo, C., 2019. Enterprise Risk Management e Managemen Accounting
Systems in una Banca di Credito Cooperativo. Enterprise Risk Management e
Managemen Accounting Systems in una Banca di Credito Cooperativo, pp.13-33.
Mukhametzyanov, R.Z., Nugaev, F.S. and Muhametzyanova, L.Z., 2017. History of accounting
development. Journal of History Culture and Art Research, 6(4), pp.1227-1236.
Sudacevschi, M., 2016. The promotion of the accounting services within the limits of
professional ethics. Challenges of the Knowledge Society, p.718.
Серая, Н.Н. and Слабая, М.А., 2016. Особенности оценки материально-производственных
запасов в системе управленческого учета. Инновационная экономика:
перспективы развития и совершенствования, (3 (13)).
Herawati, N.T., Dewi, L.G.K. and Dewi, G.A.K.R.S., 2020, December. Development of
Android-Based Accounting Cycle Learning Applications to Improve Technology Skills
in Accounting Students. In 5th International Conference on Tourism, Economics,
Accounting, Management and Social Science (TEAMS 2020) (pp. 98-104). Atlantis
Press.