Sunday, July 28, 2019
Accounting Concepts Essay Example | Topics and Well Written Essays - 1500 words
Accounting Concepts - Essay Example Under the money measurement concept, these items can be recorded as a land worth $100,000, a building (containing 10 rooms and conference hall) worth $500,000, 250 chairs at $50 each, and so on The money measurement concept assumes that money is a stable unit of measurement and therefore the value of money does not change with time. Going concern concept The going concern concept implies that accounting transactions are recorded keeping the view that the business will exist for a long period of time. More precisely, a business enterprise is considered to be a going concern but not a liquidated one. As per the going concern concept, asset valuation is done at historical cost or replacement cost. The going concern concept is a fundamental principle to the preparation of financial statements (Rajasekaran 2011, p.18). In case of short term business projects like building construction, the business comes to an end once the construction of the particular building is completed. In contrast, some business entities that operate in the automobile or consumable goods industry exist for a long period and they will continue their business activities in the foreseeable future. According to this concept, business enterprises treat prepaid expenses as assets in their balance sheets even though they are not saleable practically. Dual aspect concept Dual aspect concept is one of the fundamental accounting concepts and assumes that every transaction has a two-fold aspect Ã¢â¬â giving certain benefits and receiving certain benefits. The underlying principle of the double entry system is that every debit has an equal and corresponding amount of credit (Johnston & Johnston 2006, p.54). From the accounting equation (Assets = Liabilities+Capital), it is... The object evidence concept says that all accounting activities must be objective evidence based. In other words, there should be adequate verifiable documents to support the reliability of every transaction recorded in the books of accounts. This is the very essential for auditors to verify the reliability of accounts prepared. It is to be noted that the verifiable evidences must be objective but not subjective. For instance, a business entity has to keep receipts for the building rent paid. From the above discussion, it is clear that all the ten accounting concepts explained are greatly beneficial for accountants to prepare universally comparable, understandable, reliable, and relevant set of accounts. These accounting concepts give a standard structure to books of accounts prepared globally. Ã¢â¬Å"The accrual concept is an accounting system which recognises revenues and expenses as they are earned or incurred, respectively, without regard to the date of receipt or paymentÃ¢â¬ . In simpler words, revenue is recorded in the books of accounts on its realisation but not its actual receipt. In the same way, expenses have to be recognised when they are incurred but not when the payment is made actually. To illustrate, a business unit paid $5,000 in rent for the building and machinery a year whereas it had owed only $4,500 in rent. That means the company prepaid $500 in rent. At the end of the accounting period, the prepaid rent is recorded on the asset side of the balance sheet.