Basic Accounting Concepts

To understand how accounting works we need to assimilate certain concepts forming the basis of all accounting practices all over the world.

Accrual Concept of Accounting: Under this concept, revenue is recognized when earned, and expenses are recorded when occurred irrespective of whether received or paid. This follows the matching principle, expenses and revenue should be recognized under the same accounting period.  The auditor will only certify such financial statements following the same principle.

Conservative Accounting Approach: It requires that all the company accounts be maintained and prepared when there's a reasonable certainty that the revenue and gains will be realized and all probable losses and expenses will be recorded when they are discovered or incurred. This concept tends to draw more conservative financial statements. 

Going Concern Concept: A concern or a company is a going concern when it will continue its operations in the foreseeable future. It will not liquidate or forced to discontinue or stop the operations due to any reason. The financial statements are prepared on the same principle.  

Consistency Concept: It means that all the business transactions and events, once chosen or adopted to record the data must follow the same accounting methods in the following accounting years or periods. Financial statements prepared for multiple periods, under this principle can be comparable and are more reliable. 

Economic Entity Concept: It means the business finances should be maintained separately from the owner, shareholders, partners. By doing so, the intermingling of personal and company transactions can be avoided and personal transactions will not appear in the company's financial statements.

Matching Concept: This concept matches the expenses incurred in one accounting period against the revenue of the same accounting period or we can say the expenses are recognized against the revenue of the same period. There is no deferral of expense recognition under this concept and nothing is reported into a later period. It ensures a viewer of company's financial statements that all the aspect of a transaction has been recorded in the same accounting period.

Matereality Concept: It concerns the relevance of information and the size and nature of the transaction that is reported in the financial statement. The objective is to provide guidance to the accountant to prepare a company's financial statements that will not affect the decision making the shareholder or investor.