The term refers to the overall guidelines, conditions, and accepted norms in place which help to set the parameters and standardize accounting practices. These are the universally accepted principles which form the basis and foundation of accounting. Using these guidelines accounting decisions can be taken and financial statements prepared with uniformity in practice.
The primary purpose of accounting concepts is thus to lay down the fundamentals of the accounting system, such that business transactions can be understood uniformly in those terms. This consistency helps to achieve the coherence and transparency required in dealings between investors and stakeholders. Financial data can thus be exchanged and compared directly.
- Accounting concepts refer to the basic principles and guidelines that govern accounting practice.
- These concepts include the accrual concept, consistency concept, materiality concept, and more.
- Accounting concepts help to ensure that financial statements are accurate, reliable, and consistent.
Types of accounting concepts
- Entity Concept – This is the concept central to any business model, which explains the difference between the individual and his business. This requires the business owner as a separate identity who has to operate independently.
- Money Measurement Concept – Refers to the idea that only financial records are kept in accounting books.
- Periodicity Concept – Lays out the different time periods for which accounting needs to be done (yearly, quarterly, and monthly) in order to study the graphs and interpret the changes over time.
- Going Concern Concept – The idea that the business is a long term investment and the accounts must be prepared to keep this in mind.
- Accrual Concept – In this format transactions are recorded the moment they occur and not when the exchange of cash takes place.
- Matching Concept – This refers to the accounting of expenditure and revenue for a specific period of time only.
- Cost Concept – This dictates that any asset shall be recorded in the accounts at its cost of acquisition.
- Realization Concept – The entity is required to record the asset till it is sold off, and the maximum realizable value is reached.
- Dual Aspect Concept – By this, the individual has to record to both the debit and credit factors when it comes to any transaction.
There are also other concepts referring to the ethics and technical steps involved in the accounting process. This states the prudence and efficacy accounting requires and is expected in order to ensure the process does not become haphazard or chaotic. Disorderliness can cause massive financial losses.
Advantages of accounting concepts
- Following these generally accepted norms and regulations help in achieving uniformity, reliability, and promotes better understanding.
- Recording financial transactions at every stage ensure a more structured, organized, and transparent business model.
- Management becomes easier with respect to debts and payments, which assists in making smarter financial decisions.
Disadvantages of accounting concepts
- Non-monetary transactions become automatically eliminated, thus it does not provide the real picture of material assets and transactions.
- In case it is not done meticulously and at every stage, the piling up leads to the difficulty of tracing omissions and this leads to dangerously wrong analysis of financial status.
- Accounting concepts only make allowances for the initial and absolute realizable value of assets. The current financial status is often overlooked and difficult to be determined in this manner.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.