ACC4013 Essay: Accounting Concepts and Financial Reports

This essay provides a comprehensive overview of fundamental accounting concepts, including accrual, business entity, money measurement, going concern, full disclosure, and cost concepts, and their importance in financial reporting. It explores the impact of these concepts on the decisions of financial report users. The essay contrasts rules-based and principles-based accounting systems, highlighting the differences between GAAP and IFRS. It also discusses the various users of accounting information (internal, external, and government) and how they utilize financial data for decision-making, including the roles of financial, public, internal, tax, and management accounting. The conclusion emphasizes the importance of adhering to accounting principles and conventions for effective financial management and successful business operations.

Financial accounting

Contents
Introduction......................................................................................................................................2
Accounting concepts........................................................................................................................2
Rules vs. Principles-based accounting.............................................................................................3
Conclusion.......................................................................................................................................6
Reference.........................................................................................................................................7

Introduction
Accounting concepts and principles are important for any organization. It is essential for
organizations to follow the rules of accounting for preparing the accounts and financial
statements. This report includes the need for fundamental accounting concepts and its
requirements; the various rules are required for accounting. The analysis of key accounting
concepts will be discussed which are required for financial reports and provides the various
benefits to the users. Accounting concepts impact on the decisions related to final users.
Accounting concepts
The accounting process includes the recording, classifying, summarising in the way of money,
transactions and it helps in conveying the financial position of the business and it includes the
process of analysing and reporting the information in financial statements. The various principles
and concepts of accounting help in analysing the position of the business. Fundamental
accounting concepts help in providing the information to existing and potential investors and
creditors and in making rational investments, credits, and various financial decisions. Financial
accounting principles, concepts, and conventions are required for solving the problems of
business. The various accounting concepts are included in the business (Schipper, 200.
Accrual concept- In the accrual concept of accounting, it includes the revenue and it is
recognized when earned and recognize the expenses when assets are consumed.
Business entity concept- in the business, the expenses of the owner are separate from the
business expenses. In the entities, accounts are kept separately and are required even in
proprietorship and partnership to keep the account of businesses separate. The different forms of
organizations like proprietorship, partnership, companies, etc. are required to follow the business
entity concept (Schipper, 2003).
The money measurement concept of accounting includes the concept of recording the
transactions which are in monetary terms. Other transactions that do not include the monetary
transaction are not included in the statement.

Going concern concept- it is considered that the business and books are prepared with the
assumption to continue it for infinity years in future. It is analysed that the recording of assets
and liabilities must be in historical and current market value (Waymire, 2009). In the full
disclosure concept, all the information relating to the financial performance is required to be
fully disclosed to the shareholders of the company.
Cost concept includes the assets of the company which are required to be entered in the books of
the accounting which includes the price of assets includes transportation and installation cost. In
accounting the main element is the dual aspect concept as which includes the effect of entry on
two sides of the accounts (Larson, et al., 2002). And the entries must be recorded in two different
places which include the double-entry system in accounting.
The main elements of accounting are assets, liabilities, and capital. Assets include the resources
which are owned by the companies. It includes current and non-current assets. Current assets
include cash and cash equivalents, receivables, inventories, and prepaid expenses. Non-current
assets include long term investments, plants, and machinery, etc. Liabilities includes the current
and non-current which are payable within 12 months are current liabilities. Current liabilities
payables, tax payables, accrued expenses. Capital is those which include the interest of the owner
in the business. It includes income and expenses. The various conventions in practice of
accounting are conservatism, consistency, full disclosure and materiality (Edmonds, et al., 2013).
Rules vs. Principles-based accounting
The principle-based accounting method includes the adjustment of accounting principles in the
transactions of the company and not operating the adjustments by accounting rules. Principles-
based accounting includes the IFRS system which states that the financial statement of the
company must be readable and understandable format and can be compared easily and relevant
with the transactions of current financials (Donlson, et al., 2012).
Rules-based accounting includes the list of detailed rules which are required to be followed for
preparing the financial statements. It includes the GAAP system in which the rules are the
regularity, consistency, no expectation of compensations, continuity, and sincerity, full
disclosure of the financial reporting and honesty and good faith in the accounting transactions.
GAAP method is used by companies when they are required to make the financial statements

and annual report public (Larson, et al., 2002). It is necessary for the company to include in
financial statements the revenue recognition, classifications in balance sheets and measuring of
outstanding shares.
The various principles in accounting help in providing solutions to complex financial
transactions. It helps in leading to reporting for certain transactions and making the companies
for handling the transactions. Accountants are required to follow the rules for meeting the
penalties for noncompliance. It includes the rules for preparing and reporting financial
transactions. The company’s financial information is required to meet the rules-based system.
IFRS and GAAP are different from each other as in case of consolidation, IFRS favours the
model and GAAP includes the risk and reward model (Flynn and Koornhof, 2005). In the
statement of income, IFRS does not segregate the extraordinary items in the income statement
and in US GAAP the items are shown in net income. IN case of the rules-based accounting
system, the procedures are specific and verifiable which are used in creating the financial
statements of the company. In principles-based accounting, the system allows making the
decisions flexible (Carmona and Trombetta, 2008).
Accounting information
Accounting information includes all the information related accounting which is required to the
internal as well as the external users. It is necessary for the management of the company to
maintain and recorded the various types of accounting information for the different users and
making effective decisions for the users.
The process of accounting provides information on financial data to users of accounting
information. The users of accounting information are internal, external and government/IRS.
Different users use information differently and present the data differently (Guay and
Verrecchia, 2006). Accounting information is used by the owners and managers effectively for
making effective decisions and accounting for internal users is known as managerial accounting.
It helps the owners and managers in protecting and managing the resources of the company. It
helps in making the decisions related to borrowing and investing the resources. It helps in
downsizing and expanding the business. The external users of financial information are the
creditors, lenders, employees, customers, government units, and public. It is essential for
stakeholders to know the accounting position of the company for managing the investments. For

the purpose of tax, the federal and state government are required to prepare the documents. In
order to guide investment decisions, investors are required to use the accounting information
(Garrison, et al., 2010). Effective accounting information helps the users in making various
financial decisions and understanding the position of the business.
Accounting information includes information about Net profit and losses, the financial position
of the business, planning and controlling of the business, tax management, and social
responsibilities.
Financial accounting- It includes the aggregation of information into external reports. It
includes detailed information about the framework of accounting in the financial statement of the
company. All the information must be recorded by GAAP or IFRS. GAAP includes the generally
accepted accounting principles and IFRS is the international financial reporting standards.it is
necessary for the company to have a speciality in external reporting and detailed information
about the accounting standards (Benston, et al., 2006).
Public accounting includes the financial statements and supports the accounting system for the
clients in order to provide the assurance in the financial statements which are assembled by
clients for presenting the financial results and position. Internal auditing includes the systems and
transactions for spotting the weaknesses and controlling the wastages, frauds, and
mismanagement for the reporting. Internal auditing helps in providing a position to the manager.
Tax accounting includes the concern for the tax regulations, filling and planning for taxes for
reducing the tax burden in the future.
Management accounting is the process to accumulate information about accounting for
reporting internal operations. It includes the process of cost accounting and target costing. It
includes the positions for the positions of the cost accountants, payables clerk and payroll
(Agoglia, et al., 2011).
In financial accounting, the management of various financial statements is included with the
purpose of providing effective information to the users and owners. Financial statements include
the income statement which includes the profit or loss statement, balance sheet, statement of cash
flow and statement of stockholders equity.

Conclusion
In order to conclude the report, Accounting concepts, principles and conventions help the
management in making effective financial decisions. Accounting principles and concepts are
required to be followed for running the business successfully. Accounting helps in analysing the
financial performance of the company and it is required to follow the set rules and regulations. It
is analysed that the users of accounting information are creditors, debtors, investors, employees,
government, and proprietors. The various accounting concepts impact on the decisions of the
final users of financial reporting. The rules and principles-based accounting systems are adopted
by businesses to perform financial activities.

Reference
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