Accounting concepts
Accounting can be one of the most interesting subjects at the school and college level. A deep interest in this subject can ensure a bright future for you. But at the same time, absence of an experienced teacher can make it an extremely complex subject to deal with. If you aren’t fortunate enough to have a good teacher with you, we are here to bring you some critical accountancy concepts to help build your understanding.
You can thank us later!
- Going Concern
Apart from the situation wherein the company’s management wishes to liquidate the company or put an end to trading, all the financial accounts of the organization must be based on the going concern basis.
- Business Entity
It works on the simple concept of keeping the personal and professional life separate. Any loss or profit incurred by the owner can’t be treated as the loss or profit of the business itself. Case in point is Vijay Mallya and Kingfisher airlines.
- Money Measurement
The accounts are maintained in a measurable form, i.e. all calculations are made on the basis of money and other factors such as the market condition and the competition are kept out of the company accounts.
- Historical Cost
Any asset, owned by the company, can’t be taken at the present cost. While mentioning in the accounts, the cost of the asset must be the real cost at which it was purchased and not the present cost.
- Materiality
The immaterial amounts occurring due to small expenses such as postage and cleaning expenses can be clubbed together with other expenses. These need not be mentioned separately. A separate mention of these expenses would elongate the accounting activity, while making it cumbersome.
- Objectivity
The accounts are meant to showcase the real condition of the company. The accounting information must be unbiased. All the information mentioned in the accounting statements must be backed with adequate proofs such as invoices.
- Consistency
The accounting methods must not be altered frequently. Once the company has chosen a certain method of maintaining the accounts, it must stick to it for a considerable period of time. Any change, if brought, must only be on the basis of superiority of the new concept while ensuring that it highlights the actual situation of the company without presenting a false rosy picture to please the higher management.
- Accruals
The definition of revenue and expense must be clear. Receiving of cash can’t be termed as earned revenue. Likewise, the act of paying the cast can’t be termed as an expense.