ACCOUNTING

Basics of Accounting



Key Concepts of Accounting

Accrual accounting

It is considered as one of the standard accounting procedures that have been devised as far as most companies are concerned. The business transactions being increasingly complex, there was a need for this system albeit in the larger organizations. The accuracy of information also prompted the need for accrual accounting. A sale that is on the credit or the stream of income that is provided over the long period of time as far as the beginning of the transaction is concerned (Colquhoun & Parker, 2012, p.283). For instance, if the firm sells a single unit to a product who employs credit card as a mean of payment, the accrual accounting will say that method is not correct as the transaction is concerned as it is not certain that the firm will receive cash in the future. It is obvious that firms that operate on much larger scale are bound to make transactions involving payments in the future, to it is empirical that they have this system (Colquhoun & Parker, 2012, p.283).

Going Concern

Financial statements are prepared to keep in mind that the entity is a going concern; it means that the firm has an intention to continue and grow in the future and has the potential to back the claim. The going concern is of importance because GAAP's are to be followed in the company is a going concern (Colquhoun & Parker, 2012, p.283). GAAP's is the Generally Accepted Accounting Principles that a firm has to follow in order to be known as a going concern. Auditors of the company have to make an opinion about the firm that either it is a going concern or not looking at the financial reports and statements. For instance, the oil company in Nigeria loosed out on the contract that there were concerns regarding its going concern status.

Consistency

Consistency in the presentation is one of the more basic assumptions of IAS-1 (International Accounting Standards) besides going concern concept. It emphasizes that the methods that are being employed over one accounting period should be same as far as the materiality of the similar event goes as well as transactions recorded in other accounting period. As ironic it may sound, the consistency cannot always be maintained when we talk about the way financial accounting goes as the organizations do not follow this concept, unless there is a justification to do so. So it can be said that financial statements might not be necessarily following the consistency concept once in a while (Colquhoun & Parker, 2012, p.283).

For example, firms that used to have LIFO system for the inventory evaluation must not be switching to another method of inventory evaluation (Colquhoun & Parker, 2012, p.283).

Materiality and Aggregation

The application of the concept of materiality follows the constraint of materiality in the procedures. When we use the materiality, it gives us a way to have a degree of leeway in following the other accounting ...