What is Accounting
Accounting is the process of identifying, recording, classifying, and reporting information on financial transactions in a systematic manner for the purpose of providing financial information for decision making. Accounting Concepts and Conventions
Basically, Accounting (Take a Short Course on Accounting) is a finance support system that
- Records Transactions
- Classifies Transactions and events
- Expresses Transactions in monetary terms
- Helps to evaluate the business
- Helps to establish controls for the business
Accounting helps to arrive at the financial position of an organization at any given point in time. The organization’s financial status is reflected in the balance sheet. While the financial performance for the year is stated in the profit and loss account.
Accounting Principles, Concepts, and Conventions
The Accounting Principles, concepts, and conventions form the basis for how business transactions are recorded. A number of principles, concepts, and conventions are developed to ensure that accounting information is presented accurately and consistently. Some of these concepts are briefly described in the following sections.
Revenue Realization
According to the Revenue Realization concept, revenue is considered as the income earned on the date, when it is realized. As per this concept, unearned or unrealized revenue is not taken into account. This concept is vital for determining income pertaining to an accounting period. It reduces the possibilities of inflating incomes and profits.
Matching Concept
As per this concept, Matching the revenues earned during an accounting period with the cost associated with the respective period to ascertain the result of the business concern is carried out. This concept serves as the basis for finding accurate profit for a period that can be distributed to the owners.
Accrual
Under the Accrual method of accounting, the transactions are recorded when earned or incurred rather when collected or paid i.e., transactions are recorded on the basis of income earned or expense incurred irrespective of actual receipt or payment. For example, a seller bills the buyer at the time of sale and treats the bill amount as revenue, even though the payment may be received later.
Going Concern
As per this assumption, the business will exist for a long period and transactions are recorded from this point of view.
Accounting Period
The users of financial statements require periodical reports to ascertain the operational and financial position of the business concern. Thus, it is essential to close the accounts at regular intervals, for example, 365 days or 52 weeks or 1 Year, which is considered as the accounting period.
Accounting Entity
According to this assumption, a business is considered as a unit or entity apart from its owners, creditors, and others. For example, in the case of a Sole Proprietor concern, the proprietor is treated to be separate and distinct from the business, which he controls. The proprietor is treated as a creditor to the extent of his capital and all the business transactions are recorded in the books of accounts from a business standpoint.
Money Measurement
In accounting, only business transactions and events of financial nature are recorded, Only transactions that can be expressed in terms of money are recorded.