Accounting is an art of recording, classifying and consolidating business transactions that are financial in nature for audit and tax purposes. On the other hand, accounting concepts and principles are set by the board that provides a basic framework to financial accounting. Financial accounting concepts are the basic principles used for the preparation of financial statements. Financial statements are records of financial transactions or activities and position of a company in such a manner that it is useful for external or internal users.
Basic financial statements are:
- Balance Sheet (Statement of Financial Position)
- Income Statement
- Cash Flow Statement
- Statement of Changes in Owners’ Equity or Stockholders’ Equity
It is important to know about some accounting concepts which are helpful for maintaining the books and records, or financial statements of any company:
- Going Concern Concept: This concept is a basic underlying assumption within accounting. It assumes that a company will be able to continue its operations and remain in business for the foreseeable future.
- Dual Aspect (Duality Principle): It is a fundamental convention of accounting. Each transaction has dual aspects (double-entry), one is debit and another is credit. The total amount of assets must equal the total of all liabilities and equity of a company.
- The Money Measurement Concept: Money measurement concept states that business transactions are recorded in terms of monetary value. Like depreciation, rent, use of clerical services, selling and buying assets. Essentially, a business should only record a transaction if it can be expressed in terms of money.
- Historical Cost Principle: It is a measurement used in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired or purchased by a company. The historical cost method is used for assets in the U.S. under generally accepted accounting principles.
- The Consistency Principle: It means that once accounting methods are adopted, it must be applied consistency in future periods.
Many experts of finance and accounting know accounting concepts and take proper care and diligence in preparing the financial reports of a company. One of them is Evan Vitale, who is a Certified Public Accountant. Evan Vitale provides effective solutions to boost your business, whether you run a small or large organization.