Accounting Concepts – True and Fair View, Going Concern Concept, Accrual Concept, Matching Concept, Consistency Concept, Prudence Concept

Find here several of the main accounting concepts  – true and fair view, going concern concept, matching and accrual concept, consistency concept, prudence concept.

First of all let’s start from the objective of the financial statements.  The main objective is to provide information on the financial position and performance of the business, and also give data on the change in that position during a particular period of time. Such information is provided to a wide range of users and such users make their economic decisions based on such financial data.

What kind of information should be included in the financial statements?

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We have already talked about the parts of the financial statements and remembering that these are:

  • Assets, Liabilities, Equity – presented on the Balance Sheet
  • Revenue and Expenses -presented on the Income Statement
  • Changes in Equity, which is not related to Revenue or Expenses – presented on the Statement of Changes in Equity
  • Cash Flows – presented on the Statement of Cash Flows
  • Additional information provided in the form of notes, which includes other facts, which might be important for the users of the financial statements and which is not separately indicated in the Balance Sheet (check for this Balance Sheet Format), Cash Flow Statement, Income Statement (check for this Income Statement Format) or Statement on Changes of Equity.

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Complete set of the financial statements includes all the above items.

So when the financial statements are prepared, their preparation is based on the certain basic assumptions or accounting concepts, which will be gradually covered and explored further on this page and in other publications.

These accounting concepts are widely accepted, i.e. these are the basic principles, based on which the financial statements are prepared.

True & Fair View

First one is true and fair presentation or true and fair view. Financial statements should present fairly financial position of the business and its performance, i.e. profit or loss for the period, and also cash flows for the period.

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It is required that financial statements are compliant with the generally accepted accounting principles, which ensure fair presentation of the accounting data.

Going Concern

Second – accounting concept is going concern. Under this concept it is assumed that the business will continue its operations in the near future and this assumption is reflected in the financial statements.

While preparing financial statements we do not assume, that business will stop its operations.  Therefore, all the assumptions and all the figures in the financial statements accounted for and recorded in their way with the assumption that the business will continue to operate and it will not be liquidated or it will not discontinue significant part of its operations in the nearest future.

If this assumption is not correct or if there are any doubts that the business will not be operating in the nearest future such information must be disclosed in the financial statements so the user software financial statements they must know that the business intends to discontinue its operations or a significant part of operations or a significant part of operations.

Matching Principle

Third one – matching principle.  While preparing financial statements we must follow accrual principle or matching principle, which in principle have similar meaning.  It is essential to recognize assets, liabilities, equity, income or expenses, when they satisfy certain definition and recognition of criteria.

For example, revenue under accrual principle is recognized when earned, despite when cash will be actually received for the sale made.  Another example is that liabilities are recognized when the business is obliged to pay money to the creditors, despite that cash was not yet spent.  So this is accrual principle and these are the examples of that principle.

Consistency

One more important accounting assumption is consistency. This concept means that presentation and classification of the items in the financial statement must be consistent, continuing under the same principles and rules from one period of time to another.

In case principles of classification are changed, there must be an explanation disclosing what has been changed, this change must be supported by proper facts and should be reasonable, explaining to the users of financial statements all the circumstances and impact on the financial statements.

Prudence

One more accounting assumption is prudence.  This assumption means that while preparing financial statements accountants have to be cautious, they need to make estimates and have to be prudent  in order not to overstate value of assets or understate the value of liabilities.

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