Basic of Accounting Theory

Question Posted / guest

3 Answers
9331 Views
I also Faced
E-Mail Answers

Answers were Sorted based on User's Feedback

Basic of Accounting Theory..

Answer / shital

There are four basic accounting concepts. The concepts
specify and explain the guidelines that should be followed
when managing the accounting of a business. Below there is
a list of the these four basic accounting concepts and a
brief summary of each concept.

1. Accruals Concept

The accruals concept states that revenue from transactions
and transactions which cause liabilities are accounted for
when they occur, even if cash or property has not actually
been exchanged between the entities involved in the
transaction. For example, a dentist, Dr. Payne orders and
receives 6 months worth of toothpaste for $500 in January.
Even if he does not pay for the toothpaste until February,
Dr. Payne should still record the $500 liability in January
and not wait until February, since he owns the goods and is
liable to pay for them to the supplier. On its turn the
supplier will be accounting for the sale of toothpaste to
Dr. Payne.

2. Consistency Concept

Once certain accounting method has been applied by the
accountant, this methods must be applied throug all the
further periods for the accounting purposes. The accounting
method should only be changed if there is a valid reason
that requires the change. For example, if the accountant
starts recording transactions using the double-entry
accounting method in January, he or she should continue
applying the double-entry method for the remainder of the
accounting period. He or she should not begin applying the
double-entry method and suddenly switch to the single-entry
accounting method mid-accounting cycle for no identifiable,
valid reason. This means that all the accounting methods
and procedures must be applied consistently to ensure
comparability of information among periods.

3. Going Concern Concept

When the accounting of a business is being managed, it
should be assumed by the accountant that the business is
viable and will still operational in the foreseeable
future. If the accountant has any reason to believe that
the business will not remain viable in the foreseeable
future, he or she must state the reasons for coming to that
conclusion in the financial reports of the business. If the
accountant has an opinion that the company will not remain
in business and there are no sufficient evidence to proof
the opposite, the accountant may simply include a
disclaimer in the financial reports stating that he or she
believes, but cannot show evidence to prove that the
business will not remain viable.

4. Prudency Concept

Liabilities are accounted for in the balance sheet even if
they is only a possibility for such liabilities to occur,
despite they are potential. However, revenues are accounted
for in the financial statements only if the business has
title for such revenue and has already collected or will
collect cash or other assets in the future. If there is a
doubt about this or there is no strong legal basis to
recognize revenue, it is not accounted for in the
accounting books. This concept helps to ensure that
businesses make provisions for potential losses, not just
realized losses, and do not erroneously include revenues
that are simply anticipated, but not yet earned.