Accounting Concepts

Accounting Concepts are the basis or underlining rules (fundamentals) that guide the process of accounting.

By developing these concepts, the structure is set for all Accounting Professionals to follow, thus standardizing the Accounting system.

There are many Accounting Concepts that form the basis of Accounting, however, due to time constraints; we will look at the seven major ones now.

1- Going Concern – The assumption is that a company or entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on.

2- Accounting Equation – The accounting equation is: Assets = Liabilities + Proprietorship (or Shareholder Equity). This equation is the foundation of double entry accounting

3- Accounting Period – This is the period in which an entity’s financial reports are prepared for. Many entities close their books yearly on the 31st of December, whilst others close their books (yearly) on the 30th of June every year in following their country’s ‘Tax Year Calendar’.

4- Consistency – The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods. You are only allowed to change an accounting principle or method if the new version in some way improves reported financial results; i.e. depicts a much accurate picture – Accounting wise.

5- Unit of Measure – The unit of measure concept is a standard convention used in accounting, under which all transactions must be consistently recorded using the same currency. If a transaction involves receipts or payments in a different currency, then the amount(s) should be converted to the home (base). Without a common unit of measure, it would be impossible to produce financial statements. You can’t add five (5) oranges to two (2) apples.

6- Accrual – The accrual concept in accounting means that all expenses and revenues are recorded in the period that they occur in, whether or not cash is involved. The benefit of the accrual approach is that financial statements reflect all the expenses associated with the reported revenues for an accounting period.

7- Matching - The matching concept exists only in accrual accounting (Cash Accounting will be discussed later on). This principle requires that you match revenues with the expenses incurred to earn those revenues and that you report them both at the same time.

All accounting personnel, whether it is from the CFO to the accounts assistant, are required to follow the Accounting concepts whilst performing their accounting duties, especially during the Accounting Cycle. Accounting standards are based on these concepts.

Accounting Concepts are set up for a reason……..& that reason is to provide a structure for the accounting profession. If everyone followed their own rules, then there would be havoc, and unreliable financial reports and information going around, driving bad decision making to take place.

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