Principles of Accounting: Introduction to Accounting Concepts

• In the real world various measurement standards have been devised to aid communication, comparisons, trade and the sharing of ideas
• For example units of measurement such as grams, meters, liters etc are universally used
• We know what a kilogram looks like
• Before the invention of these standards people had to improvise when making trades
• This resulted in inconsistencies and difficulties when making comparisons
• The same has happened in accounting
• In historical times accounting was usually a self-taught discipline with various ways of doing things
• Even when accounting evolved in the not so distant past there were frequently different alternative ways of doing things
• How should we calculate depreciation, how do we arrive at the cost of goods sold in an inflationary world etc
• This led to the development of accounting concepts
• These concepts have several goals :
  1. These are meant to ensure objective and consistent reporting
  2. They also ensure that the resultant financial statements show a true and fair value
  3. They also ensure that the financial statements and underlying records are free from material error and fraud
• These concepts are developed by the International Financial Reporting Standards Foundation
• They are given as part of financial reporting standards
• These standards prescribe how financial transactions are supposed to be recorded and presented
• Accounting concepts are at the heart of these financial reporting standards
• These standards are quite complex and make for heavy reading
• You are not required to know them per se
• You are only required to know the following concepts and their implication:
  1. Accrual/Matching concept
  2. Prudence concept
  3. Going concern concept
  4. Consistency concept
  5. Historical cost concept
  6. Double entry concept
• To learn more about each concept just click/tap on it
• It is important to note that by this time you are already familiar with most of these concepts
• We have touched on them implicitly in the exercises and notes we have written thus far
• Here we are only making you explicitly aware of their existence
• You should note that while these concept are not part of the law (legal framework) their acceptance, various laws etc make them the de facto standards
• They cannot be ignored are should be treated as the laws of accounting in as much as we have laws of physics
• While all concepts are considered important the following concepts are considered to be fundamental concepts:
• Going concern
• Consistency
• Prudence
• Accruals
• Materiality

To access more topics go to the Principles of Accounts Notes.