Basics of accounting concept,preparation and presentation of financial statements analysis of finiancial statements .
Answers
Financial accounting refers to collecting, summarizing and presentation of the financial information resulting from business transactions. It reports the operating profit and the value of the business to the stakeholders. In other words, financial accounting is used for reporting financial transactions to the stakeholders in a format that is acceptable and adaptable by all businesses.
Accounting Concepts
How are financial statements prepared?
Presentation of financial statements
Accounting Concepts
Accounting Concepts that form the basis of financial accounting are:
Accrual concept
Financial accounting can be done on an accrual basis or cash basis. Accrual basis is highly accepted. An organization may also use a combination of both. Cash basis of accounting requires transactions to be recorded only when the transaction results in a flow of cash. However, under accrual basis, a transaction is recorded when the transaction occurs and revenue is recognized.
Once an organization selects the method, cash or accrual, it should consistently use the same.
Economic entity concept
This concept assumes that the owners are separate from the business and there are no personal transactions recorded in business.
Going concern concept
Under this concept, it is assumed that the organization will remain in business for a long time and hence the revenue can be deferred to a different period.
Matching concept
This concept stresses that the expenses relating to a particular income must be recorded in the same period. This ensures that a transaction is fully accounted for.
Materiality Concept
Reporting of all material transactions should be the aim of reporting. Material transactions are those transactions if omitted can alter an investors analysis of the business.
Conservatism
A revenue must be recorded only when it is reasonably certain that it will be realized in the near future.
The heart of financial accounting is the Double entry system of bookkeeping. Double entry system refers to recording two aspects of the same transaction. The recording of the aspects will be as per the Golden Rules for Accounting.