An accounting concept is a set of basic rules, assumptions, or concepts that define the accounting works’ parameters. Accounting concepts are accepted as principles that form the basis of preparation for financial statements and business records (Bailey and Samuels, 2018, pp. 20-22). It is used as a tool to create a comprehensive uniform base of financial information to be followed by all entities and can be used to solve various economic issues (Jollands and Quinn, 2017, p. 182). There are various accounting concepts: business entity concept, money measurement concept, matching concept, accrual concept, periodicity concept, and more (Maheshwari et al., 2021). The practicality of a concept depends on how it is implemented, and not all concepts are interchangeable (Wynder, 2018). While some may think understanding the theory is trivial, the following five concepts will be analyzed because they are a valuable tool in accounting, have practical application, and help to avoid mistakes.
Business Entity Concept
The business entity concept is an accounting concept that defines that a transaction associated with a business must be regarded and recorded independently from its owner and other business companies. It means a different use of accounting records and exclusion of assets, liabilities, and entities (Weygandt et al., 2018). Its use means different business results can be observed and analyzed separately. Without it, they would mix, which would make it more challenging to give each record a critical examination. It means that monetary transactions unrelated to the company’s operations should be regarded separately. This concept is essential as it allows differentiating the business company as an independent entity rather than an extension of its owner or other businesses.
Money Measurement Concept
The money measurement accounting concept relies solely on the financial information of transactions. According to this accounting concept, businesses should record transactions only if they can be defined in a monetary manner. The monetary measurement concept means that many items would never be recorded in accounting documentation and, therefore, disappears from the company’s financial statements. An example of The Molson Coors Brewing Company demonstrates how it can be difficult to apply when it comes to goods-oriented records and companies (Hamilton, 2019). It would be inaccurate to dismiss the tangible goods data, as it is how the company operates. Thus referring to the expenses made to obtain materials and tools necessary for the goods-making can be an alternative.
Dual Aspect Concept
The dual aspect accounting concept requires every business transaction to have records in two separate accounts. According to the dual aspect, the concept is expressed through the fundamental accounting equation: assets equals liabilities plus capital (Murphy, 2018). The dual aspect states that the assets of a transaction are always equal between the owner and the outsiders. The transaction has an equal impact on assets and liabilities and their sum. Most records apply this method, as it demonstrates both sides to a transaction. All online deliveries present information on both the cost of the purchase and delivery that is a part of the whole transaction. This accounting concept is massively used as it helps accountants detect mistakes and correct them in the records.
The accrual accounting concept means that an accountant recognizes spending and revenues when a deal is sealed rather than when the cash amount is paid or received. This accounting concept is essential from the recording perspective because it ensures that the spending data is recorded within the necessary time (Murphy, 2018). A lack of accrual records can lead to companies having mismatching and inaccurate records of their transactions. If a deal between two companies is signed at the end of June 2021, it should be recorded as such, even if the monetary transaction happens after the mentioned date. By recording the data at the time of the agreement, the accounting record keeps the data accurate regardless of the other factors that may change the timing for the payment. Therefore, the Accrual accounting concept becomes essential to keep the complete picture of a company’s business transactions.
The materiality accounting concept states that accounting regulations can be put aside if doing so has a small to negligent effect on the financial statement. As long as the statement is not misleading and the item represents a small portion of total assets, then the information is considered immaterial and dismissible. The Molson Coors Brewing Company separates spendings that are not directly connected to the primary business operations (Hamilton, 2019, p. 34). They do so because these transactions tend to be one-time events that do not regularly occur and therefore do not need to be included in the central records.
Qualitative Characteristics of Financial Reports
There are several qualitative characteristics of financial reports that determine a record’s qualities. These qualities determine if the financial record reports all the necessary information without missing any essential elements. The central qualitative characteristics are relevance, faithfulness, understandability, and comparability (Al-dmour et al., 2017). These characteristics determine how well the information is put together, whether it is relevant, transparent, comparable, and faithful to the data. When some of these factors or all are neglected, the records become challenging to analyze and assert. Therefore, it is crucial that companies take these factors into account.
- Relevance factor means that the information is relevant for all involved parties and the transaction.
- Faithfulness factor means that the information should be free of errors, bias and be complete without excluding any important transactions.
- Understandability factor means the data must be understandable to a reader and avoid unnecessary jargon and terms.
- Comparability factor requires the information to be comparable to other records from the company, for example, by the year (Cannon, 2019, p. 49).
When one or more qualitative characteristics are neglected in financial reports, it can make the information inaccurate, inaccessible, or irrelevant. Without the records, a company’s performance cannot be measured correctly (Kalantonis et al., 2021). A financial record that considers the qualitative aspects, on the other hand, presents information in a clear and easy-to-understand manner, without neglecting any data, and becomes an essential tool for the business.
Accounting concepts and qualitative characteristics are practical tools that help one determine the importance of various data within accounting records. Using it as a guideline demonstrates what information needs to be recorded and what information needs to be discarded. It is up to the accountants and the company to decide what concept is the most relevant for their business. It helps to make the accounting record relevant, accurate, and faithful, thus preserving the business’ history and analyzing the potential outcome in its future.
Al-dmour, A., Abbod, M. F., & Al-dmour, H. H. (2017) ‘Qualitative characteristics of financial reporting and non-financial business performance,’ International Journal of Corporate Finance and Accounting, 4(2), 1-22.
Bailey, W. J., & Samuels, J. A. (2018) ‘Analyzing two investments—an instructional case to introduce basic financial accounting concepts,’ Issues in Accounting Education Teaching Notes, 33(4), pp. 18-29. Web.
Cannon, M. L. (2019) ‘An exploration of key accounting concepts through case studies,’ Honors Theses. 1102, pp. 1-94.
Hamilton, Olivia (2019) ‘The Application of Accounting Concepts Through Case Studies,’ Honors Theses, 1005, pp. 1-129.
Jollands, S. and Quinn, M. (2017) ‘Politicising the sustaining of water supply in Ireland – the role of accounting concepts,’ Accounting, Auditing & Accountability Journal, 30(1), pp. 164-190.
Kalantonis, P., Delegkos, A. E., Sotirchou, E., & Papagrigoriou, A. (2021) ‘Modern business development and financial reporting: exploring the effect of corporate governance on the value relevance of accounting information—evidence from the Greek listed firms,’ Operational Research, pp. 1-19.
Maheshwari, S. N., Maheshwari, S. K., & Maheshwari, M. S. K. (2021) Principles of management accounting, Sultan Chand & Sons.
Murphy, K. C. (2018) ‘Understanding the basic principles of accounting: A case-by-case application,’ Honors Theses, 515, pp. 1-90.
Weygandt, J. J., Kieso, D. E., Kimmel, P. D., Trenholm, B., Warren, V., & Novak, L. (2019) Accounting Principles, vol. 2, John Wiley & Sons.
Wynder, M. (2018) ‘Visualising accounting concepts: insights from cognitive load theory for English as a second language students,’ Accounting Education, 27(6), pp. 590-612.