Concepts and principles are critical parts of accounting because they set up a universal framework for discussing particular financial situations, rules, and theories. Training in accounting can help clarify the details of complex transactions and assist in resolving any disputes that may arise while creating financial statements. You can get help from online accounting courses UK to understand this part.
PURPOSE OF USE:
Accountants are professionals who record a company’s financial transactions. Periodic summaries of these transactions or financial reports give managers, investors, analysts, and the government relevant financial information about a company. If every business follows an independent system for creating and producing summaries and statements, it could lead to discrepancies and increase the scope of fraud and financial mismanagement. To overcome this, accounting bodies, governments, and regulatory agencies use a universally agreed-upon set of principles to standardize accounts assistant training.
DIFFERENCE B/W CONCEPT AND CONVENTION:
Online accounting courses UK explain using concepts and conventions to make up accounting principles. Accounting concepts are a company’s rules and guidelines to manage accounts that record financial transactions.
Government bodies and financial institutions legally recognize it, and a legal and regulatory framework complements their function.
One of the primary benefits of these concepts is that they aid in recording financial transactions based on evidence and leave little to no chance for personal or professional bias or gain. Online accounting courses UK assist in creating standards, resolving potential disputes, and preventing fraud and irregularities.
Training in accounting is a practice a business entity follows over time to prepare its accounts. Unlike theoretical concepts, conventions are a procedure that companies universally follow.
The purpose of accounting conventions is to guide accountants while they prepare financial statements.
Accounting conventions are dynamic and can change when new concepts and principles emerge.
One significant advantage of following accounting conventions is that it ensures similar accounting practices across businesses, making it easy for stakeholders to interpret the financial performance of different companies using the same benchmark.
Business entity concept:
Online accounting courses in the UK explain the use of separate entity concepts, assuming that a business is independent of its owner. A company may not record its owner’s personal expenses, income, liabilities, and assets. It aids in tracking a business’s expenses, income, and tax deductions without any ambiguity. This clear distinction helps stakeholders and creditors make appropriate business decisions based on a company’s performance rather than the owner’s financial position.
Going concern concept:
Online accounting courses in the UK explain the going concern concept and prescribe that accountants prepare financial statements assuming a business may continue its operations for the foreseeable future. The definition of a foreseeable future is 12 months from the end date of the reporting period. If a business owner or the management is invested in scaling down business operations to zero, they cannot apply the going concern concept for accounting. Accountants may no longer use the going concern concept.
Money measurement concept:
Online accounting courses UK explain is an accounting concept based on assumption, and it stipulates that companies record only those transactions that they can quantify and measure in terms of money. If they cannot assign a monetary value to a transaction, they do not record it in their annual financial statement. These transactions affect a company’s financial performance.
Accounting period concept:
Online accounting courses UK prescribe a timeframe within which a business records and reports its financial performance for the purview of internal and external stakeholders. A company can determine a timeline for internal reporting, like three or six months, or prepare monthly financial reports to analyze their cash flow positions. Management can evaluate a convenient accounting period for internal reporting, but reporting for investors, government, and tax purposes is typically for one year.
Accrual concept:
Online accounting training guides a business in recording cash or credit transactions. Under this concept, a company registers a financial transaction in the period it occurs. It does not consider whether the business pays or receives cash at the time of the transaction or if it pays cash after a certain period. All modern training in accounting systems follows the accrual concept in recording financial transactions.
Revenue realization concept:
Online accounting courses UK Under the revenue realization or recognition concept, a seller records potential revenue from a transaction, regardless of whether they have received proceeds. The ownership of a product transfers from a buyer to a seller during a sale.
Full disclosure concept:
The entire disclosure concept requires a business entity to furnish necessary information for the benefit of those who read financial statements and reports for investment, taxation, or audit purposes. This concept provides essential economic information to investors, creditors, shareholders, clients, and other stakeholders. Disclosure policies cover revenue recognition, depreciation, inventory, taxes, earnings, stock value, leases, and liabilities.
Dual aspect concept:
The dual aspect concept states that every transaction affects two business accounts. A business then records both aspects to enable accurate accounting. Every financial transaction has a credit, debit, giver, or receiver aspect. If an accounting process does not represent both, it may lead to faults in the final accounting record. Training in accounting, the dual aspect concept is the foundation of the double-entry system of bookkeeping, which is now a standard method for auditing and taxation.
Materiality concept:
The materiality concept prescribes guidelines to identify if financial information is material and whether it can influence the person reading a company’s financial statements. Based on this concept, an accountant or a business may remove negligible transactions that may not affect final accounts. This concept is open to subjective interpretation, and the basis for using the materiality concept varies with company size. While a large company may round off figures in the final accounts to crores, a small firm may round off their figures to lakhs.
Verifiable objective evidence concept:
Under this concept, a business can record only those transactions for which they can furnish documentary proof. Training in accounting with proper and valid documentary evidence, a transaction can be balanced and independent, and it can increase the scope of financial irregularities. For example, a retail employee may present a bill for purchases and sales and corroborate it with sale and purchase invoices.
Historical cost concept:
Online accounting courses UK explain the historical cost concept, which states that a business may record assets and liabilities at their historical cost rather than their current market or sale value. It helps to maintain consistent, reliable, and verifiable financial information. Including the present value of an entity can result in financial irregularities.
