Accounting concepts are rules used as guidelines by accountants when recording business transactions and creating financial statements, helping maintain reliable records.
The going concern concept assumes that a business will remain operational for an acceptable amount of time, as well as meeting its commitments and liabilities.
Realization Concept
The realization concept stipulates that business revenue should only be recognized once earned – this usually occurs when goods or services have been delivered and payment received – this principle of cut off accounting helps businesses comply with standard financial reporting assumptions.
This concept is essential because it enables your clients to provide customers with more flexible payment options while still being able to record revenue accurately. For instance, if they sell a couch on credit and receive payments over several months from customers in installments. By adhering to the realization principle, your client can record full revenue when shipping their product and earning process completes; providing clearer financial records as well as making budgeting and forecasting easier.
Accruals Concept
The accrual concept is designed to recognize all a company’s revenues and expenses regardless of whether sales transactions take place with cash or credit payments. It takes into account any delay between selling goods or services and receiving payment by recording each transaction immediately on its balance sheet; revenue accruals and expense accruals fall under this principle.
Assume a company provided consulting services to a client in December but issued invoices only in January of the following year; in this instance, its balance sheet would reflect that income as accrued revenue; similar to how products or rent might be recorded based on business.
Accrual accounting gives a more realistic representation of a company’s financial status than cash accounting does, which is why both US GAAPs and IFRS accounting frameworks recommend its use when compiling financial statements.
Common Unit of Measure Concept
Money measurement concept is an accounting principle which states that all transactions and events should be recorded monetary values for ease of comprehension in financial statements. Furthermore, this principle helps simplify addition and subtraction operations as well as prepare profit and loss accounts and balance sheets with ease.
Accounting measurements offer a more holistic understanding of a company’s performance. For instance, employee numbers reveal much about productivity and efficiency – for instance if Company ABC employs four salespeople to generate $10,000 worth of weekly sales while Company XYZ utilizes eight – this can reveal much about each company’s competitive strengths.
Utilising multiple measurement units can also enhance communication among assembly personnel and engineering staff. For instance, when ordering resistors from Digi-Key, individual resistors are entered rather than ordering an entire reel of 5,000 resistors at one time.
Materiality Concept
The materiality concept states that only information which is meaningful and significant should be included in financial statements, to ensure its omission or misstatement will not significantly alter economic decisions taken by reasonable users of this report.
Determining whether an item is considered material requires professional judgment. A small expense might be significant to one company but not another due to differences between organizations’ sizes.
Materiality helps accountants weed out irrelevant data. For instance, matching and accrual concepts don’t permit expense of an electric pencil sharpener for $5 in its entirety when purchased; but using materiality concept can avoid recording it all as an asset for depreciation purposes – as doing so would require tracking usage by individual sharpeners which is both time consuming and costly.
