Accounting is a systematic process of the identifying, capturing, measurement, recording, classification, summarization, interpretation and communication of financial information. It is usually referred to as “the language of business”. Accounting practitioners are usually known as
accountants. Accounting is a very wide field and is usually divided into smaller fields. Accounting is governed by a set of basic rules and concepts that ensure that financial information is analyzed and presented in a fair and understandable way. These accounting rules are formulated by certain
accounting standard setting bodies such as the Financial Accounting Standards board and also
professional bodies. Here are the main accepted accounting rules that you need to learn in order to generally understand accounting to ensure that you provide professional services;
1. Going Concern principle
This principle stands by the assumption that an entity or company will be in existence and will
continue with its operations for the foreseeable future. It is assumed that the entity has neither the
plans nor necessity to cease its operation or liquidate. This assumption gives an accountant the
authority to carry over to future accounting periods, prepaid expenses for the current year. It is
usually up to the management to establish whether the going concern principle is suitable in the
preparation of financial statements of their organization. If it is not, they will be force to prepare their financial statements based on the break up basis. This means that prepaid expenses form the current year cannot be carried over to the next accounting period. This also means that the organization’s assets will be recognized at their selling price on disposal rather than their net book
values. This principle facilitates the preparation of financial statements and this concept enables the accountant to judge a business by its capacity to make profits in the future periods.
2. The Matching principle
This is an accounting rule that require accountants to use the accrual basis. The accrual basis
requires that expenses that are incurred by an entity must be charged to the financial statement in
the period that the expenses were incurred not when they are paid. For instance, employee wages
are recorded as an expense in the income statement in the period when the workers performed their tasks and not when they were remunerated.
3. The Duality principle
This is another accounting rule that emphasizes on the double entry accounting system. The double entry accounting system ensures that all aspects of a business transaction are recognized in financial statements. Under this rule the accounting aspects of a transaction are classified under one of either two categories: debit or credit. The debit category represents an increase in either assets or expense or a decrease in liabilities and income while the credit category represents an increase in income and liabilities and a decrease in assets and expenses.
4. The Money measurement concept
The money measurement concept is also known as the measurability concept. This concept states that only those transactions and items that are measurable in monetary terms can be recognized in an organizations’ financial statement. However, those items that are not recognized due to lack of measurability in monetary terms sometimes require disclosure in form of notes in the financial statement. Most of the times, some items cannot be recognized in financial statements with precise amounts therefore the accountant has to come up with a reasonable estimate on the approximate value of the item being recognized.
5. Realization concept
This concept is also known as the revenue recognition principle. This concept is deals with the
recognition of income or revenue using the accrual concept. This principle is similar to the matching concept only that this one deals with revenue alone. The realization concept states that revenue is only recognized by the seller only when it is earned and not when the cash is received.
6. Substance over form concept
The substance over form concept emphasizes on the importance of economic substance of transactions being recorded rather than only their legal form. This is done in order to provide the true and fair view of the state of the company. This concept involves the accountants’ judgment in order to be able to derive the economic sense of transactions that show the true state of the entity. Legal aspects of financial transactions are also quite important. However, at times they may have to be disregarded in order to derive more relevant and useful information.
Accounting policies and procedures from different accounting periods should be uniform in order to facilitate analysis and comparison of financial performance in different periods. Any changes that are material even if it is a step towards improving technique should be disclosed. When accounting procedures and policies are followed consistently over many periods, an entities financial statement will be uniform and comparable.
Accounting is process of simply recording and presenting financial transactions and without
principles we cannot be able to communicate the information recorded. This why people all across
the world come together in order to formulate rules that will make financial statement across the
world uniform and comparable. This has led to so many developments in analyzing different
organizations’ financial performance and even the economy. The main goal is to maintain
consistency and uniformity in accounting records. These concepts make up the very basis of
accounting. All concepts have been developed over many years from experience and thus they are
universally generally accepted rules.
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