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Accounting Concepts - Essay Example
Author : shanon59
Finance & Accounting
Pages 6 (1506 words)
This paper will evaluate 10 key concepts of accounting and demonstrate by a suitable example for each concept as to how they help accountants prepare universally comparable, understandable, reliable and relevant set of accounts. …
The object evidence concept says that all accounting activities must be objective evidence based. In other words, there should be adequate verifiable documents to support the reliability of every transaction recorded in the books of accounts. This is the very essential for auditors to verify the reliability of accounts prepared. It is to be noted that the verifiable evidences must be objective but not subjective. For instance, a business entity has to keep receipts for the building rent paid. From the above discussion, it is clear that all the ten accounting concepts explained are greatly beneficial for accountants to prepare universally comparable, understandable, reliable, and relevant set of accounts. These accounting concepts give a standard structure to books of accounts prepared globally. “The accrual concept is an accounting system which recognises revenues and expenses as they are earned or incurred, respectively, without regard to the date of receipt or payment”. In simpler words, revenue is recorded in the books of accounts on its realisation but not its actual receipt. In the same way, expenses have to be recognised when they are incurred but not when the payment is made actually. To illustrate, a business unit paid $5,000 in rent for the building and machinery a year whereas it had owed only $4,500 in rent. That means the company prepaid $500 in rent. At the end of the accounting period, the prepaid rent is recorded on the asset side of the balance sheet. ...