Accounting is the main language used in business. Accounting information is utilized in communicating the affairs of a business unit to others, especially those who own or manage it. This information must be carefully recorded, classified, collapsed and presented. Accounting uses several concepts to make the language send out the same meaning to all people. A few of them are given below:
First, the Business Entity Concept. From the viewpoint of accounting, a business is different from the person who owns it. This allows the recording of transactions of the business with the proprietor. Without this difference, affairs of this nature will not be available.
Second, is the Cost Concept. Transactions are encoded in the book of accounts with the amounts actually involved. For instance, a firm purchases a piece of land for $5000, but considers it to be worth $6000. The purchase will be written down as $5000 and not any more.
This is one of the most important ideas in accounting - it prevents arbitrary values being put on transactions, especially those, which involve the acquisition of assets. This also means that the amount to be recorded is objectively arrived at because of the mutual agreement of the two parties involved.
Of course, sometimes, accountants have to be satisfied with just an estimate- the amount of depreciation to be charged each year in respect of machinery is an example. The amount has to be an estimate since the future life of the machinery cannot be known precisely.
Third is the Money Measurement Concept. Accounting records only those transactions, which are expressed in monetary terms, though quantitative records are also kept. An event, even though important, like a quarrel between the production manager and the sale manager, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy.
First, the Business Entity Concept. From the viewpoint of accounting, a business is different from the person who owns it. This allows the recording of transactions of the business with the proprietor. Without this difference, affairs of this nature will not be available.
Second, is the Cost Concept. Transactions are encoded in the book of accounts with the amounts actually involved. For instance, a firm purchases a piece of land for $5000, but considers it to be worth $6000. The purchase will be written down as $5000 and not any more.
This is one of the most important ideas in accounting - it prevents arbitrary values being put on transactions, especially those, which involve the acquisition of assets. This also means that the amount to be recorded is objectively arrived at because of the mutual agreement of the two parties involved.
Of course, sometimes, accountants have to be satisfied with just an estimate- the amount of depreciation to be charged each year in respect of machinery is an example. The amount has to be an estimate since the future life of the machinery cannot be known precisely.
Third is the Money Measurement Concept. Accounting records only those transactions, which are expressed in monetary terms, though quantitative records are also kept. An event, even though important, like a quarrel between the production manager and the sale manager, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy.
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