Analysis of Accounting Concepts and Financial Report Qualities

This report provides an overview of key accounting concepts and the qualitative characteristics of financial reports. It begins by defining and illustrating five fundamental accounting concepts: the business entity concept, which separates the owner from the business; the dual aspect concept, ensuring every transaction has a debit and credit effect; the going concern concept, assuming the business will continue indefinitely; the matching concept, aligning revenues with related expenses; and the realization concept, recognizing revenue when earned. Furthermore, the report details the qualitative characteristics that make financial reports useful, including relevance, faithful representation, comparability, timeliness, understandability, and verifiability. These characteristics ensure that financial information is accurate, reliable, and decision-useful for both internal and external stakeholders. The report concludes that understanding and applying these concepts is crucial for accurately evaluating a business's financial health and stability.

ACCOUNTING FOR BUSINESS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASKS.............................................................................................................................................1
a) Five accounting concepts used in the preparation of the financial statements illustrated with
the relevant example....................................................................................................................1
b) Qualitative characteristics of financial reports making the information more useful for the
users.............................................................................................................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Financial accounting in the business is one of the most significant function that shall be
assisting in the reporting of the financial performance and the profitability of the business. This
information is useful for the various internal and the external users of the business. The current
project report shall be depicting the various accounting concepts that are to be followed for the
accurate results. Apart from that it shall be representing the qualitative characteristics of the
financial reports.
TASKS
a) Five accounting concepts used in the preparation of the financial statements illustrated with
the relevant example
Business entity concept
This concept states that the owner and the business are two separate persons and
independent entities and the routine transactions shall be in the name of the business. This is the
major reason that if the owner contributes the capital it is booked as the liability of the business
and if they withdraw the amount they are not business expenses rather are considered drawings
and deducted from capital. Also, all the assets are purchased in the name of the company.
Example:- If the company purchases the furniture and the plant and machinery then these assets
are purchased in the name of company and belongs to the business and not the owner.
Dual aspect concept
This concept of accounting suggests that every transaction of the entity has the dual effect
one is the debit and the other is the credit (Wiedenhofer and et.al., 2019). The recording in the
books of accounts has to be done considering the dual aspect of all the transactions completing
the double entry. This shall also satisfy the fundamental accounting equation that is Assets =
Liabilities + Capital and hence match both the sides of the balance sheet of the company.
Example:- Suppose a transaction is undertaken which is the goods are purchased for cash in the
company. In such case since cash is received against the sales so the cash account shall be
debited and on the contrary the sales of goods account shall be credited.
Going concern concept
The concept shall be specifying that the business shall be continuing for the foreseeable
future of indefinite period and the assumption is that the business shall not be dissolving in the
near future of the company. This means that the activities are to be carried out on a continuous
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basis and that is the reason long term perspectives are being undertaken in the company by the
management and the arrangements are also accordingly made to facilitate the same.
Example:- The most common example is that the company purchases the fixed assets for the
longer time like 10 years and also charges the depreciation over this period thinking that the
company will continue the operations.
Matching concept
This concept determines that the revenues that are earned over the period are to be
recorded in the books but simultaneously the expenses that are made in respect of earning such
revenues are also to be recorded in the books of account. This shall be depicting the accurate
profitability for the company after notifying both the revenues and expenses that are incurred in
the particular accounting period. The matching refers to income and the expenses which are
related to be accounted for together (Aziz and Ahmad, 2018).
Example:- Suppose the company has ascertained that the salesman are to be paid a commission
of 10% on the amount of sales which is of 100000. Then in that case even though the sales
commission is to be paid at a later date then to both the sales figure of 100000 and the
commission of 10000 shall be recorded stating the profits of 90000.
Realization concept
This concept ascertains that the company can realize and recognize the revenues in the
company only when they are actually incurred. This is when the company has the legal rights of
recovering as well as receiving the income in the company. And only when the revenues are
actually earned then they can be accounted for in the books of accounts.
Example:- Suppose the company got the order of sales on 10th January and the delivery for the
same was made on 20th January and the payment was about to be received on 1st February. So the
revenues from sales shall be recorded on 20th January when the delivery is made and the sales are
recognized for the company.
b) Qualitative characteristics of financial reports making the information more useful for the
users
Certain qualitative characteristics of the financial reports in the company are important
for the business as they make the reports more useful for the users of the financial information.
These are some major characteristics:-
Fundamental characteristics
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 Relevance- The relevant information for the users is being depicted in the reports which
consists of the past data which can be used for the predictions that are to be made in
respect of the future (Herath and Albarqi, 2017). This shall also be assisting in the
process of decision-making wherein the users can decide regarding the company.
 Faithful representations- The representations of the data that are made in the financial
reports are faithful and accurate in nature such that it accounts for all the resources,
claims and the various transactions without any biases and errors. It should picture the
true profitability in the business.
Enhancing characteristics Comparability- The data should be such regrading the standards, concepts, policies and
the principles used in the formation of the financial statements so that it facilitates the
comparison over the time periods in the company as well as outside with the other
competitor organizations (What are the Qualitative Characteristics of Accounting
Information? 2021). Timeliness- The timeliness is the regular updates and information that is provided by the
company to the users of these statements so that the decisions are being efficiently
formulated. Understandability- The understandability of the accounting information is also necessary
and such that is easily accessible to all the users even though they have the average
knowledge of the business (Unerman, Bebbington and O’dwyer, 2018).
 Verifiability- The verification is done on the basis of the extent to which the results are to
be reproduced by the company.
CONCLUSION
From the above project it can be summarized that accounting is the important function to
evaluate the performance of the business and know the exact position in terms of the financial
health and stability. But there are specific concepts of the accounting that needs to be followed in
order to achieve the qualitative characteristics in the financial reports of the business.
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REFERENCES
Books and Journals
Wiedenhofer, D. and et.al., 2019. Integrating material stock dynamics into economy-wide
material flow accounting: concepts, modelling, and global application for 1900–
2050. Ecological economics. 156. pp.121-133.
Aziz, N. M. A. and Ahmad, F. A., 2018. Islamic Green Accounting Concepts for Safeguarding
Sustainable Growth in the Islamic Management Institutions. International Journal of
Academic Research in Business and Social Sciences. 8(5). pp.830-847.
Herath, S. K. and Albarqi, N., 2017. Financial reporting quality: A literature
review. International Journal of Business Management and Commerce. 2(2). pp.1-14.
Unerman, J., Bebbington, J. and O’dwyer, B., 2018. Corporate reporting and accounting for
externalities. Accounting and Business Research. 48(5). pp.497-522.
Online
What are the Qualitative Characteristics of Accounting Information? 2021. [Online] Available
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