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Accounting is now an essential for all types of businesses operating in the all types of businesses. The accounting practices were not following the standards few decades earlier which created the conflict between the financial information of the company operating in different studies which created the need of developing a standard for the accounting practices.
The current study has been made in order to study the ten key concepts of the accounting. The study has found that all these concepts are very critical for the accounting information and following these core concepts result in the accomplished accounting information of a company.
"It is known that various concepts and conventions of accounting which have been invented and practiced for a long time have always helped accountants prepare universally comparable, understandable, reliable and relevant set of accounts".
The importance of accounting is inevitable and it is widely used in every type of organization regardless of the organization type or size. The accounting is practiced widely across all types of industries. Few decades ago, the accounting was practiced by different professional on the basis of the undefined standards which triggered the conflicts between the accounting practices. This directed the professionals to bring the accounting practices at one common standards that will used for all types of accounts related operations (Bisman, 2007).
Most of the accountants mutually agreed upon different concepts of accounting, in order to bring the accounting standards at common grounds to ensure that the same meaning is delivered to the different people, working in the different areas of organizations. These accounting standards have made a vital role in providing more meaningfulness to the accounting concepts. They have a wider use in the financial statement to provide them maximum level of accuracy. The accounting concepts are now considered as the baseline of the complete accounting process and it is believed that all types of businesses cannot prepare the accurate financial statements without following these accounting concepts (Bredmar, 2011).
The accounting concepts that have been defined to bring the accounting practices to a standard have been elaborated below:
Concept of Business Entity
This accounting concept defined that the business itself is a separate entity apart from its members. It is important to maintain the separate book keeping for the business and its members while both of them are needed to be not portrayed as a collaborative record. This concept also declared that proprietors are needed to be considered as the creditors of the business and it is important to do the separate book keeping of the proprietors' other businesses (Swieringa, 2011).
For example; the insurance premium of the house that is owned by owner of the business should not be included in the business expenses. Similarly, the properties that are owned by owner should not be included in the business account premises.
Concept of Money Measurement
The concept of money measurement states that all those transactions that are of monetary nature are needed to be recorded. The unit that is used for the measurement of the transaction should be a standard unit and it should be used in all measurements. The transactions that are recognized as the qualitative transactions are ignored in the concept of money measurement though they have critical importance for a business (Swieringa, 2011).
For example; if an organization is experiencing various market conditions or the technological developments, they will not be disclosed in the accounts. Similarly, the accounts will also illustrate the management efficiency of the organization.
Concept of Going Concern
The concept of the going concern states that the existence of the business operations will be considered for a very long term future. It is needed to require the fixed assets of the business should be recoded according to their original cost values. It is critically important to include the depreciation in the original cost values of the fixed assets of the organization. The concept of the going concern enables the other parties to get in contract on the long term basis (Richardson, 2008).
For example; it is not required to include the closing prices of a company since, its operations have been considered for a very long term future. The depreciation of that company is recorded against the projectile revenue that is expected in the future.
Concept of Accounting Period
The concept of account period states that it is required to divide the life of the firm into sets of specific time periods. These time periods are developed in order to evaluate the ratio of the profit and loss to the business while this time period is referred as the accounting period. There are two types of accounting periods and both of them are considered as standards. The accounting period starts from April 1st every year and it ends at March 31st next year. The second accounting period starts from January 1st every year and it ends at December 31st same year (Lucas and Mladenovic, 2009.
For example; the accountants of an organization will start their new financial year from 1st April while they are required to close the all the transaction of the financial year till 31st March and they will start the new recorded from the 1st April.
Concept of Historical Cost
The concept of the historical states that the fixed assets of the business should be recoded according to their original cost values. This cost will provide a baseline to the all accounting operations regarding the assets of the organization. The cost of the acquisition is needed to be considered as the past and that is why they are referred as the historical cost. This means that the assets are recorded as the purchase cost on the balance sheet instead of the evaluated cost of the assets at the time when they are recorded (Beil, 2003).
For example; an organization will recorded the fixed assets cost on the cost acquisition date. This will also include the cost that the organization has spent on the asset to make it usable where it is intended to use. This will further include the assets' prices that have been mentioned over the invoice, the charges for the logistics and also the cost of installation.
Concept of Dual Aspect
The concept of the dual aspect state that all the transaction that will be recorded in the book will influence two accounts at least. The one will be the debtor account while the other account will be creditor account. This refers to an entry system which is referred as the double entry system of recording. Collectively, the record of the transaction in the book also requires the record in the accounts of the debtors and the creditor (Beil, 2003).
For Example; the debtor will make the payment which required a new record in the debtor's account while the receiver is the creditor here where it is required to add a record in the creditor's account.
Concept of Conservatism
The concept of conservatism states that the assumptions are not made for the revenues and profits evaluations. Profit and loss account should be updated with those profits and losses only that have been evaluated with certainty. For the expense accounts. Both the assumptions and the certain evaluations are recorded. The concept provides the baseline to assets valuation and the reported profits minimizations (Rezaee, 2005).
For example; the company usually adopt the stock valuations where the applied standard is to minimize the cost and along with the value are evaluated certainly. The company will include the debts which it is going to make on the basis of an estimation while the assets of the company will experience depreciation over the time.
Concept of Materiality
The concept of materiality states that immaterial finances should have a collaboration with all the amounts of the corresponding genres. This portrays that the materials amounts should be recorded separately from the immaterial amounts. The materiality is completely dependent upon the size of the item as well as on the nature of the item (Vladu and Matis, 2010).
For Example; the small payments that have been made by company shouldn't be recorded in a separate section. These expenses should be recorded along with the miscellaneous expenses of the company. Similarly, depending upon the size and genre of the items, the assets that are valued small should be recorded as the revenue expenditures in the profit and loss account of the company.
Concept of the Objectivity
The concept of the objectivity states the existence of any limitation or bias is totally unacceptable in the recorded accounting information. The accounting information should be also valid for all types of verifications that are made independently. All the stated information should have the evidences that could also be verified. These evidences include the invoices of the all transaction or the contract that have been made by the organization (Cost et al., 2010).
For example; if the information has been recorded in the accounts of a company, regarding the purchase of the equipment. It is important for the accountants to have the physical evidence of the purchase that should include the purchase invoice, the freight invoice and the invoice of the services used for the installation of that equipment.
Concept of the Consistency
The concept of the consistency states that an organization should implement those accounting techniques that have maximum compatibility with the organizational infrastructure and genre. It is important to use that method consistently. The companies should introduce the method only, if the previous method is inferior to the new one while the method should include the efficiency and the accuracy of the accounting information. It is also important to mention the changes that have been made and the impact that it has made on the profit in the organizations financial statements (Henage et al., 2004).
For example; if an organization has currently implemented the reducing method, it can switch to straight line method in the next period since, it will increase the efficiency and accuracy of the accounting information while company can't switch to an inferior method than the one which is currently being used.
The study has concluded that the above mentioned ten core concepts of the accounting provide a baseline to the accountants to develop an accomplished, accurate and efficient accounting information of a company.