The Fundamental Accounting Concepts And The Role Of Financial Accounting In Aiding The Decision Making Processes Of Four Different Non Management Stakeholder Groups

2455 words - 10 pages

IntroductionReliable, relevant financial statements present the best information about a company's economic history, current financial health, and prospect for the future (Johnson, 2004). The preparation and presentation of financial statements require the use of certain rules to ensure truth, fairness, and consistency.Accounting employs a number of concepts. They underlie all traditional accounting in commercial organizations and are generally employed in non-commercial organizations as well (Bebbington et al, 2001). Although various concepts have been employed, few have found universal agreement. However, four are deemed to be important (Oxford, 2002). The four fundamental accounting ...view middle of the document...

Each of these statements summarizes specific information that has been identified, measured, recorded, and retained during the accounting process (Johnson, 2004).As said earlier, financial accounting employs a number of concepts, because financial accounting seeks objectivity, and of course it must have rules which lay down the way in which the activities of the business are recorded. These rules have long been known as accounting concept (Wood et al, 1999). These concepts are used as guidelines for how the final accounts should be drawn up (Horner, 2000).These basic concepts should be followed by accountants when producing financial statements. These concepts have evolved over time to deal with various practical problems that may arise in accounts. If accountants did not follow these rules then it would be impossible to evaluate the performance of the business or even compare it with one company's performance.Going concern concept:The first basic concept is going concern. This concept implies that the business will continue to operate for the foreseeable future. It means that it is considered sensible to keep to the use of the historic cost concept when arriving at the valuations of assets (Wood et al, 2004). Without this assumption, assets would to be valued at what they would realise if sold, and this amount is very different from their 'book value' or 'value to the business' (Pizzey, 1998).Example:Firm (A) is drawing up its final accounts at 31 December 2006. Normally, using the cost concept, the assets would be displayed at a total value of 0,000. It is known, however that Firm (A) will be forced to close down in April 2007, only four months later, and the assets are anticipated to be sold for only ,000. In this situation it would not make sense to keep to the going concern concept, and so we can refuse the historic cost concept for asset valuation purposes in situation such this. In the balance sheet at 31 December 2006 the assets will therefore be shown at the amount of ,000.Accruals concept:The second basic concept is accruals. It is also known as matching concept. This concept is based on the principle that revenues and costs are recognised as they are earned or incurred, are matched with one another, and are dealt with in the profit and loss account of the period to which they relate, irrespective of the period of receipt or payment (Davies et al, 2005). This means that revenues and costs are recognised when they are earned or incurred rather than when the related cash is received or paid.Example:Firm (A) which always sums up its finances according to fiscal year. If, by the end of 2005, gas bills had been received for the period up to 30 November only, the statement must include an estimate of gas used in December. Conversely, if in January 2005 rent had been paid in advance for the 16 months to 30 April 2006, the statement would include only the rent for the 12 months to 31 December 2005.Consistency concept:The third basic concept is...

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