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Define basic concept of accounting?

There are a number of conceptual issues that one must understand in order to develop a firm foundation of how accounting works. These basic accounting concepts are as follows:

Accruals concept- Revenues are recognized when earned, and expenses are recognized when assets are consumed. This concept means that a business may recognize sales, profits and losses in amounts that vary from what would be recognized based on the cash received from customers or when cash is paid to suppliers and employees. Auditors will only certify the financial statements of a business that have been prepared under the accruals concept.

Conservatism concept- Revenues are only recognized when there is a reasonable certainty that they will be realized, whereas expenses are recognized sooner, when there is a reasonable possibility that they will be incurred. This concept tends to result in more conservative financial statements.

Consistency concept- Once a business chooses to use a specific accounting method, it should continue using it on a go-forward basis. By doing so, the financial statements prepared in multiple periods can be reliably compared.

Economic entity concept - The transactions of a business are to be kept separate from those of its owners. By doing so, there is no intermingling of personal and business transactions in a company's financial statements.

Going concern concept- Financial statements are prepared on the assumption that the business will remain in operation in future periods. Under this assumption, revenue and expense recognition may be deferred to a future period, when the

company is still operating- Otherwise, all expense recognition in particular would be accelerated into the current period.

Matching concept. The expenses related to revenue should be recognized in the same period in which the revenue was recognized. By doing this, there is no deferral of expense recognition into later reporting periods, so that someone viewing a company's financial statements can be assured that all aspects of a transaction have been recorded at the same time.

Materiality concept- Transactions should be recorded when not doing so might alter the decisions made by a reader of a company's financial statements. This tends to result in relatively small-size transactions being recorded, so that the financial statements comprehensively represent the financial results, financial position, and cash flows of a business.

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Read the following hypothetical Case Study and answer the given questions:The financial statements, comprising the Trading A/c, Profit & Loss Account, Balance Sheet and Cash Flow Statement, that are prepared from the accounting information are published for the use by different entities, persons, etc. It is therefore essential that the published information is based on defined principles, concrete concepts and conventions. Accounting principles are the basic guidelines that provide standards for accounting practices and procedures to be followed, so that uniformity in accounting transactions is maintained. Accounting concepts are the assumptions on the basis of which financial statements are prepared. Accounting conventions emerge out of the accounting practices that have been followed by various organizations, over a period of time. The generally accepted accounting principles are generally accepted accounting standards. The concepts on the basis of which the financial statements are prepared and are agreed upon by the accountants, acting as a foundation for accounting are called accounting concepts. They are uniform set of rules for uniformity and understandability of accounting information. They are derived from experience. They are not static. It needs to satisfy relevance, objectivity and feasibility. The going concern concept assumes that the enterprise has neither any intention nor any necessity to close the business and will last for a long time. It enables the firms to enter into long term contracts. It enables for the charge or depreciation on assets which have fixed life. Due to this concept prepaid expenses are treated as assets. It helps in the classification of assets and liabilities. According to Consistency concept, the accounting principles and methods should be consistent. It should not vary every year. It enables to compare the financial stability of the business. There needs to be consistency in valuation of stock, depreciation and provisions, to enable better decision making by the management. It doesn’t mean that the accounting methods should not change, but the nature and effect and the reason for change should be stated.________ are the generally accepted rules and assumptions that assist accountants in the preparation of financial statements.

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