accounting concepts

  

Definition

Rules of accounting that should be followed in preparation of all accounts and financial statements. The four fundamental concepts are
(1) Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out;
(2) Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise;
(3) Going concern: the business entity for which accounts are being prepared is in good condition and will continue to be in business in the foreseeable future;
(4) Prudence concept (also conservation concept): revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is reasonable 'possibility' of incurring them.

Other concepts include
(5) Accounting equation: total assets equal total liabilities plus owners' equity;
(6) Accounting period: financial records pertaining only to a specific period are to be considered in preparing accounts for that period;
(7) Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value;
(8) Entity: accounting records reflect the financial activities of a specific business or organization, not of its owners or employees;
(9) Full disclosure: financial statements and their notes should contain all relevant data;
(10) Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower);
(11) Maintenance of capital: profit can be realized only after capital of the firm has been restored to its original level, or is maintained at a predetermined level;
(12) Matching: transactions affecting both revenues and expenses should be recognized in the same accounting period;
(13) Materiality: minor events may be ignored, but the major ones should be fully disclosed;
(14) Money measurement: the accounting process records only activities that can be expressed in monetary terms (with some exceptions);
(15) Objectivity: financial statements should be based only on verifiable evidence, including an audit trail;
(16) Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off;
(17) Unit of measurement: financial data should be recorded with a common unit of measure (dollar, pound sterling, yen, etc.).

Also called accounting conventions, accounting postulates, or accounting principles.

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