Accounting Theory - Basic Accounting Concepts

There are four basic accounting concepts. The concepts specify and clarify the guidelines that should be followed when managing the accounting of a business. Below there is a list of the these four basic accounting concepts and a brief summary of each thought.



1. Accruals Concept



The accruals conception states that revenue from transactions and transactions which cause liabilities are accounted for when they occur, even if cash or property has not actually been exchanged between the entities alive to in the transaction. For example, a dentist, Dr. Payne orders and receives 6 months worth of toothpaste for $500 in January. Even if he does not pay for the toothpaste until February, Dr. Payne should serene relate the $500 liability in January and not wait until February, since he owns the goods and is liable to pay for them to the supplier. On its turn the supplier will be accounting for the sale of toothpaste to Dr. Payne.



2. Consistency Concept



Once sure accounting device has been applied by the accountant, this methods must be applied throug all the further periods for the accounting purposes. The accounting design should only be changed if there is a noble reason that requires the change. For example, if the accountant starts recording transactions using the double-entry accounting draw in January, he or she should continue applying the double-entry design for the remainder of the accounting period. He or she should not commence applying the double-entry blueprint and suddenly switch to the single-entry accounting plot mid-accounting cycle for no identifiable, proper reason. This means that all the accounting methods and procedures must be applied consistently to ensure comparability of information among periods.



3. Going anguish Concept



When the accounting of a business is being managed, it should be assumed by the accountant that the business is viable and will composed operational in the foreseeable future. If the accountant has any reason to occupy that the business will not remain viable in the foreseeable future, he or she must status the reasons for coming to that conclusion in the financial reports of the business. If the accountant has an idea that the company will not remain in business and there are no sufficient evidence to proof the opposite, the accountant may simply include a disclaimer in the financial reports stating that he or she believes, but cannot note evidence to expose that the business will not remain viable.



4. Prudency Concept



Liabilities are accounted for in the balance sheet even if they is only a possibility for such liabilities to occur, despite they are potential. However, revenues are accounted for in the financial statements only if the business has title for such revenue and has already serene or will acquire cash or other assets in the future. If there is a doubt about this or there is no strong proper basis to peruse revenue, it is not accounted for in the accounting books. This belief helps to ensure that businesses develop provisions for potential losses, not honest realized losses, and do not erroneously include revenues that are simply anticipated, but not yet earned.