Home » Accounting Explanation » Accounting Concepts and Conventions


Objectivity Concept

See neutrality

Neutrality Concept

Financial information should be neutral and bias free

Information must be free from bias to be reliable. Neutrality is lost if the financial statements are prepared so as to influence or affect the user to make a decision in order to get a predetermined outcome or result.

Reliability Concept

Information would be reliable when it is free from errors, bias and it is complete.

Users of financial statements assume that financial statements have been audited which implies that they are accurate and bias free. so, the company should double check and get audited their financial statements before publication

Faithful representation Concept

Financial statements must express faithfully the transactions they purports to present in order to be reliable. There is a risk that this may not be the case not because of bias, but due to inherent difficulties in identifying the transactions or finding an appropriate method of measurement or presentation. Where measurement of the financial effects of an item is so uncertain, companies are not supposed to recognize such an item, for example “internally generated goodwill”.

OTHER IMPORTANT ACCOUNTING CONCEPTS AND CONVENTIONS


Stable monetary unit Concept

Financial statements are expressed in terms of a monetary unit (for example dollar, Euro, pound). According to this accounting concept, it is assumed that value of monetary unit will not change

In practice the value, of course, change and it would be misleading if you compare current accounts with previous accounts. The value of a currency usually varies at the time high inflation rate

The Money measurement Concept

According to this principle, accounts will only be prepared for those items to which a monetary value can be assigned

EXAMPLE

In the balance sheet assets and other items are presented in some monetary value i.e. machinery and plant = $500000

Importance of Money measurement Concept

Implementation of this concept results in uniformity of financial statements prepared by different companies, if all of them are following the same monetary unit (such as dollar)

This concept helps accountants to determine materiality of an item i.e. whether an item worth reporting in financial statements or not

It helps in comparing the financial statements prepared by the different companies and financial statements for one accounting period with financial statements for another accounting period

Assigning monetary or money value to an item is the prerequisite to understand the worth of an entity or its assets

Historical cost Convention

This implies that transactions are recorded at original cost at the time when they are occurred.

EXAMPLE

ABC Company had purchased a vehicle 5 year ago for $5000. Now the company can present that vehicle at $5000 (as the cost of asset) in its current balance sheet.