Accounts are records of financial transactions, where the information about how much has been spent and how much has come in, is entered onto a sales ledger. The completed ledger can be manipulated to produce reports and this helps with financial planning.
In preparing accounts there are several accounting principles which must be followed:
This assumes that a business will continue to trade in the future.
The same principles must be used for every set of accounts that is prepared. For example, depreciation must always be set at the same percentage. This means that different sets of accounts can easily be compared to see trends and growth rates.
Accountants should always err on the side of caution in their estimates and valuations. For example if revenue were to be over-estimated dividends may appear to be due to shareholders that have not actually been earned.
Sales and costs are considered to be incurred at the point that the sale is made and delivered, rather than when the company is actually paid. This means that sales which have been secured, perhaps in the form of orders taken but not yet delivered, will not be taken into account.
This is about the relative importance of individual transactions. Most parties will only be interested in significant amounts. This means that lots of low value sales for one customer could be combined together. However if combining transactions could mislead the user of the accounts the amounts should be split out.
When looking at fixed assets, such as fully owned buildings and machinery, only the original cost of the item is recorded. Its actual value may be quite different, perhaps due to rising property prices, but to calculate a value would make the accounts subjective.
Financial transactions from one person or group of people should be isolated from other unrelated transactions from the same person or group. For example, a sole trader may be withdrawing money for their salary but this would be classed as two transactions because the owner is receiving money and the business is paying out money.
Transactions that happen over a period of time must reflect a single currency and exchange rate. This will allow one year’s set of accounts to be compared with another regardless of the rate of inflation.
Duality dictates that every transaction has two effects. For example, if a company buys a new asset such as a new printing machine, then fixed assets must be shown to increase and either cash or liabilities must also show an increase.
Source: Essay UK - http://www.essay.uk.com/free-essays/accounting/accounting-principles.php
If this essay isn't quite what you're looking for, why not order your own custom Accounting essay, dissertation or piece of coursework that answers your exact question? There are UK writers just like me on hand, waiting to help you. Each of us is qualified to a high level in our area of expertise, and we can write you a fully researched, fully referenced complete original answer to your essay question. Just complete our simple order form and you could have your customised Accounting work in your email box, in as little as 3 hours.
This Accounting essay was submitted to us by a student in order to help you with your studies.
This page has approximately words.
If you use part of this page in your own work, you need to provide a citation, as follows:
Essay UK, Accounting Concepts and Principles. Available from: <http://www.essay.uk.com/free-essays/accounting/accounting-principles.php> [01-10-16].
If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal: