What are accounting concepts and why are they important?

What are Accounting Concepts?

Accounting Concepts are general rules, principles, and reasonable assumptions that are followed for uniformity in recording accounting transactions.

In essence, Accounting Concepts are somewhat derived from Generally Accepted Accounting Principles (GAAP), which are fundamental in recording financial transactions and in the preparation of Financial Statements.

Objectives of Accounting Concepts

The primary aim of Accounting Concepts is to promote a uniform and consistent method of recording business transactions in time for the preparation of Financial Statements.
It serves as a general guide to accountants in recording and maintaining financial documents because only such is supported by the concept of recording in the books of accounts.
It promotes uniformity to achieve a standardized manner of financial reporting and to compare financial statements between companies.

Top 12 Accounting Concepts

What are accounting concepts and why are they important?

Entity Concept

This concept basically states that the business is a separate entity from that of its owner and as such, is recognized as an artificial person that keeps its own records and transactions.

Money Measurement Concept

This concept refers to transactions that have monetary values which means that only financial transactions are entered into the company’s books.

Periodicity Concept

This concept states that a business must record its transactions for a certain period of time, referred to as the financial year.

It is possible to prepare financial reports monthly, quarterly, and annually. This practice promotes an easy way of monitoring the performance of the company.

Accrual Concept

In accrual accounting, income is recorded when earned even when cash is not yet received, and expense is recognized when incurred even when it is not yet paid.

The consideration of cash is not the priority in this manner of recording transactions.

Matching Concept

The matching principle is connected to the periodicity and accrual concept.

This concept dictates that for every expense incurred, the company will generate revenue from that same expense.

The revenue and the relative expense incurred must be recorded in the same accounting period.

Going Concern Concept

It describes the continuous existence of the entity for an unforeseeable future.

The entity has an intention to operate for an indefinite period.

Cost Concept

The recognition of a purchased asset will be at its historical value or the asset’s acquisition cost.

Realization Concept

The realization concept promotes an accurate recording of an asset over some time.

It needs a proper recognition of its realizable value because the asset’s value deteriorates over time, especially when the company plans to sell the asset or dispose of it.

Dual Aspect Concept

Most accounting practices follow double entry bookkeeping.

It means that when recording financial transitions, a debit and its corresponding credit must also be recorded for the same value.

Conservatism

The conservatism concept prepares the entity for any recognizable future losses.

There is no specific amount recorded yet but only provisions or reasonable estimates are made.

This concept is only for recognizing expenses.

This accounting concept does not encourage estimates and assumptions of future revenues.

Consistency

The purpose of accounting policies is to make it easier for companies to compare reports across entities.

The uniformity of recording and preparation of the financial statements makes it easy for users to analyze an entity’s financial performance and compare the same to other companies in the same industry.

Materiality

An amount is said to be material if it affects the business’s day-to-day operations – whether it is a positive or negative effect.

It must be noted that the materiality concept could significantly affect the fair presentation of the financial statements.

Importance of Accounting Concept

The accounting concept applies to every stage of financial accounting and reporting, from recognizing relative transactions to recording accounting books until financial statement preparation and disclosure to the different users of the financial statements.
The Accounting Concept is based on the guidelines set by GAAP. It is a systematized process of recording transactions and maintaining account records that help accountants save time and effort.
The accounting concept promotes an easy understanding of financial information, relevance, reliability, and comparability in financial statement preparation and reporting.

Accounting Concept vs. Accounting Convention

Accounting Concept	Accounting Convention
Basic rules, principles, and assumptions are followed by assigned personnel in recording financial transactions.	Accountants follow Generally Accepted Accounting Principles for uniformity in the method of recording.
The governing bodies authorize the use of accounting concepts. They are typically transcribed from international standards.	These are accounting practices generally followed by accountants. It is not governed by any authoritative bodies but is generally accepted because it still supports principles and regulations of accounting standards.
In every stage of account recording and financial statement preparation, the accounting concepts and principles must always be followed.	Accounting convention is followed in the preparation of the Financial Statement.
The accounting Concept is an applied theory in the recording and maintenance of books of accounts.	It is a systematic approach to the financial statement preparation

Advantages & Disadvantages of Accounting Concept

Advantages

It provides accurate and balanced information on the assets and liabilities of the company.
It provides relevant and significant information that is used for decision-making.
It provides a faithful representation of management’s financial status to its end users
A simple and concise way of recording for a better understanding of its users.
It promotes uniformity in terms of financial statement reporting across entities.

Disadvantages

The effect of not following the accounting concepts at every stage of recording include the following:
- Omission of significant financial information and a material misstatement in the financial statements.
- It will be difficult to trace any omitted transactions.
- Inaccurate Financial Reporting can lead to wrong interpretations and will result in wrong decision-making.
- Unreliable Financial Statement
Non-recognition of non-monetary items.
Immaterial amounts are not considered in this concept.
There are different recognition processes of materiality for every entity, which will affect the comparability of every entity’s financial statements.
It does not present the true financial status of a company because it does not allow the recognition of assets at realizable value.

Conclusion

Accounting concepts guide accountants in the accepted way of recording and maintaining transactions in the books of accounts and the financial statement preparation.

This concept provides general principles, rules, and assumptions to promote uniformity in financial statement reporting.

It means that the core principle that entities follow in accounting for business transactions depends on accounting concepts.

These concepts are made to make the financial transactions more understandable in the simplest terms because not all intended users understand accounting jargon.

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Sinhgad Instututes "ACCOUNTING CONCEPTS��" Chapter 2. August 30, 2022
Penn State "Accounting principles, concepts and policies" Page 1 - 13. August 30, 2022

Why accounting concepts are important in accounting?

Importance of Accounting Concept It improves the quality of financial statements and reports concerning the understandability, reliability, relevance, and comparability of such financial statements and reports.

What is meant by accounting concepts explain any four important accounting concepts?

Accounting concepts are those basis assumptions upon which basic process of accounting is based. Following are the basic accounting concepts: 1) Business Entity Concept. 2) Dual Aspect Concept. 3) Going Concern Concept.

What are accounting concepts and why are they important?