Critically evaluate the importance of accounting concepts in preparing the financial statements. Introduction
What is accounting?
Accountancy is concerned with the recording, collating and presenting of financial information in a meaningful manner. What an Accounting Concept?
1. The Entity Concept
The most basic concept in accounting is that of the entity. An accounting entity is an organisation that stands apart as a separate economic unit. We draw boundaries around each entity so as not to confuse its affairs with those of other entities (Horngren/Harrison-Accounting Chapters 1-17, page 9). There is so much information available about any entity that accountants start by determining what an entity is. The data collected are restricted to that of the entity itself. This sometimes very difficult, especially in small entities where there is often no clear distinction between the public affairs of the entity and the private affairs of the owner. In a profit-making business, for example the owners sometimes change their household expenditure to the business or use their private bank account to pay for goods and services meant for the business. They have then to establish exactly what the business owes the owner and what the owner owes the business. The accountants will, however, only interested in recording in the books of the business the effect these various transactions have on the business: they are not interested in effect that they have on the owner’s private affairs. Indeed, it would be an entirely different exercise if the accountants were to deal with the owner’s private affairs. This would mean that they were accounting for two different entities-one private and one public-although there may be a great deal of overlap between them (John R. Dyson-Accounting for Non-Accounting Students, page 27).
What is Financial Statements?
The financial Statements are the:
1. Income statement
2. Statement of Owner’s Equity
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