Accounting and accounting concepts: What you need to know

Accounting is the regular and all inclusive recording of institutions financial transactions. It also comprises of analysis done on these transaction and relaying the information through a report.
Accounting is an integral part of a business which is charged with the responsibility of reporting the financial status of the business. This information is relied upon by the administration in decision making and at times problem solving. The reports offer insight on how the business is doing, if it’s making profits or losses, equity distribution, liquidity ratios and such financial issues. It allows an institution to adequately budget and allocate resources to ensure continuity of operations in the entire business. Accounting can be done by bookkeepers in small entities, while medium entities can have a pool of accountants and in larger entities the accounts can be done by entire firms.

Modern accounting has been made easy by introduction of computer programs in its development. ERP or enterprise resource planning system provides a central point of access to all financial reports with regards to the business. Advanced softwares are able to generate and process accounting reports by keying in figures as understood by an accountant and produce results which are more accurate.

Growth of financial institutions has led to developments in accounting field. Earlier times accounting was only for the purposes of memory so one knows how much they have since most businesses were sole proprietorship. Today some institutions are global with assets in many major cities and investors spanning across the entire globe accounting has had to evolve to accommodate these changes. Investors might not really know about the operations of the institutions so they would rely almost entirely on the accounting reports. These reports had to be split to reflect the internal management reports and financial accounting geared towards investors and other stakeholders.

Accounting Principles

Generally Accepted Accounting Principles (GAAP) these are standards that accountants are required to adhere to when working on financial statements or financial accounting. Standards are determined as per jurisdiction requirements and may vary slightly from jurisdiction to jurisdiction. Currently different countries are moving into globalized standards as determined by International Financial Reporting Standards (IFRS) due to harmonization of accounting principles.

Accounting concepts

These are rules that form the basis of accounting reporting.

Business entity concept

This accounting concept distinguishes between the owner and the business as separate entities. Profitability of the business is only considered from revenues and expenses of the business. What the owner puts in the running of the business is known as capital, assets, equity or the business liability to the owner. What they take out in form of domestic or personal use is known as drawings and not to be considered as business expenses in financial accounting.

Money measurement concept

This accounting concept states that all accounting is to be done in monetary terms or value. All measurements should hold money as their basis and recorded in that country’s currency. For example employee motivation cannot be expressed in monetary value but rent and equipment can be expressed in terms of monetary value and will be recorded as such in the books of account. 

Going concern concept

Businesses are regarded as entities with continuity of life this forms the basis of this accounting concept. Businesses are expected to run their activities with this regard and will not dissolve in future. This concept helps in determining the value of assets like land belonging to the business. For example if purchased for the business the value will only be recorded as an expense in that year but converts to asset from then on.

Accounting period concept

This accounting concept states that accounting reports need to be done in regular intervals as determined by the business. This helps in determining taxation, profitability, financial position etc. These reports can be done quarterly, biannually or annually through the accounting period or financial year. The financial year carries the same basis of a calendar year only difference is the financial year may start from any month but follows 12 month cycle to the same month the next year to form a complete financial year.

Accounting cost concept

This accounting concept asserts that a business’s assets are accounted for as at their purchase price including all costs that were incurred during purchase such as transportation to site and installation. The concept helps in determining if the asset depreciated or appreciated in value over time.

Dual aspect concept

This concept is based on fundamental accounting formula that is Assets are determined by the addition of liabilities and capital where liabilities are the creditor’s assets and capital the owner/s assets. That is every transaction in a business will affect two opposite sides the credit and debit side. Thus the transaction will reflect in these two sides.

Realization concept

Businesses are required to record in their books money realized not expected.  Money has to be received to be accounted for from all transactions to be recorded. Orders are not considered revenue until they are fulfilled.

Accrual concept

This accounting concept follows the realization concept and states that revenue is recorded when realized. This means that when a purchase is made but payment is made after that particular financial period the purchase can only be recorded in the period it happened not when the revenue is collected. This is because the purchased item was already in the custody of the business before payment was made. This is recorded as a debtor in that particular financial period when the purchase took place and creditor if the transaction is vice versa.

Matching concept

This accounting concept follows accrual concept and asserts that expenses and revenues received or expected to be paid should be recorded and used to determine profit or loss for that particular accounting period.