Accounting Concepts

Find here several of the basic accounting concepts – true and fair view, consistency concept, prudence concept. Also find here links to other financial accounting concepts:

Objectives of Financial Statements

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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Below there is a list of the main parts of financial statements, therefore this information has to be provided and divided into the below categories:

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.

As 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 articles.

These financial 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.

Consistency

One more important basic accounting concept 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 concept is prudence. This concept 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.