Every accounting student must have felt the same in their primary stages and that’s because all the roar about accounting concepts and the apparent failure to learn them effectively. For now feel free, because all your confusions and fears about such stuff are going to be blown apart and we are here to deliver that to you.
Accounting concepts are eighteen in number
1. The going concern concept
2. The accounting period concept
3. The relevance concept
4. The reliability concept
5. Money measurement
6. The matching concept
9. Faithful representation
10. Substance over form
13. The comparability concept
15. The materiality concept
17. The business entity concept
18. The realization concept
Now, read along through the next portions and also run through to the end to learn more about their usage.
It takes the assumption that the entity will run indefinitely, that means the entity will have a lifetime the end of which we can’t foresee. Now, this seems much of an absurd one to many, but, this is more than useful in the real world and how is that? If you think it this way, you have started a business and you are going to record the transactions for your business. If you go forward with your decision to record the transactions and to do that using the accounting methodologies, then do you know what you are facing?
You should simply treat your business as eternal, because, if you don’t do that then what’s the point of categorizing all your accounts into sub-categories like- assets, liabilities, revenues and expenses? If you treat your business with a lifetime which you can see will end in near future, then if you keep only the balance of your overall revenue over your overall expense, that’s not going to hurt you or, anyone at all.
The reason is simply that such work will hamper no one and you are the only liable person for your business as this is one sole proprietorship entity. But, think of a company. If the BOD thinks on one sudden accounting period that the company has lost all its functionality and thinks of not sticking to the original running entity approach, can you think what will happen? All the investors will be in complete jeopardy if the company takes such an attempt as people may lose loads of money regarding this decision. If they gun for such a decision then the partitioning between all the accounts will be absurd.
Use: Balance sheet preparation.
The time the entity takes to record and deliver their financial statements and to close them subsequently in between.
The time can be in different forms, like-
See, all the time frames are usual and sensible, but, it is somewhat unconvincing, unconventional and also disturbing. Why is that? Let’s check out:
1. For an company if the accounts are closed for each day then it is rather troublesome because, the workload is much larger with the number of accounts and the required staff power required to close the accounts every day would cost the company loads of its resources without providing an ample return
2. Same is for a week, though the workload is relatively lower here, it is not that much lower compared to the workload that would finally come out
3. Same is here
4. This is the most convenient and followed after for years now. Because, this is the standard method providing the standard amount of workload for the staff
5. This method is also used but, not very popular one. Because, in this modern era users of the information would like to be benefitted from the information more and a two year interval is not very user friendly
6. This method is not user friendly in fast paced industrial standard and so not applied much
The principal reason behind choosing the yearly interval is that the accounts are needed to be audited by professional accountants and the process is called “Audit”. Just imagine you are doing that every day/month/week!! Can you imagine the cost and the agony it may bring you? The yearly method has the upper hand there. The last two methods are not chosen because they can be relatively non user-friendly methods.
USE: To prepare profit and loss a/c, trading a/c, manufacturing a/c or, to simply put it as per modern structure- income statement.