accounting concept

Topics: Balance sheet, Bookkeeping, Periodization Pages: 5 (1211 words) Published: September 25, 2014
Author: Mr Nasheeb Rassan

Accounting Concept and Conventions
In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities.

To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.

Accounting Period Concept
Also known as Time Period where business operation can be divided into specific period of time such as a month, a quarter or a year (accounting period)
Final accounts are prepared at the end of the accounting period ie one year. Internal accounts can be prepared monthly, quarterly or half yearly.

Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy. Business should report its activities or economic events at their actual cost. For example, fixed assets are recorded at their cost in accounts except for land which can be revalued due to application.


Author: Mr Nasheeb Rassan

The other conventions you will encounter in a set of accounts can be summarised as follows: Money

Also known as Monetary unit. Transactions related to the business, and


having money value are recorded in the books of accounts. Events or


transactions which cannot be expressed in term of money do not find a place in the books of accounts. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.

Separate Entity
This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. Also known as Accounting Entity convention .Thus, business records should be separated and distinct from personal records of business owner.


With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms.


An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts.


Author: Mr Nasheeb Rassan
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