Four Accounting Theory and Its Basic Accounting Concepts

Accounting Concepts

The accounting concepts which specify and explain all the guidelines that are usually followed in managing the accounting of business are generally known as accounting concepts or accounting theory. There are four parts which include in these concepts. Below you will get the concepts and a brief summary of each concept to make you more understand.

1. Accruals Concept

The accruals concept generally states that revenue comes from transactions. The transactions that cause liabilities are accounted for when they occur, although the cash or property has not actually been exchanged between the entities involved in the transaction. For example, a hairdresser, Ms. Camilla orders and receives 3 months worth of styling foam for $300 in June. Although she does not pay for the styling foam until July, this accounting concept makes Ms. Camilla should record the $300 liability in June and not wait for until July. Since she owns the products and is liable to pay for them to the supplier. On its turn, the supplier will be accounting for the sale of styling foam to Ms. Camilla.

2. Consistency Concept

This accounting concept has been applied by accountants through all the further periods for many accounting purposes. This method will be changed only if there is a valid reason which makes this method needs to be changed. For example, if an accountant starts recording transactions using the double-entry accounting method in June, he or she must continue applying the double-entry method for the remainder of the accounting period. The double-entry method doesn’t need to be applied but just directly switch to the single-entry accounting method mid-accounting cycle for no identifiable, valid reason. This should be followed because all the accounting concepts must be applied consistently to know whether the information among the periods has been comparability or not.

3. Going Concern Concept

The basic reason of using accounting is to know that the business is active and will still operationally well moving in the foreseeable future. If an accountant sees that the business will not be active in the future, the accountant need to state the prediction for making that conclusion in the financial reports of the business. If an accountant thinks that the company is in critical condition and there is no way out to survive the company or cannot find the best way out to save it, so the accountant is allowed to state a disclaimer in the financial reports what she or he believes even if there’s no an evidence to show or to proof that the business will be able to stay viable.

4. Prudency Concept

In this accounting concept, liabilities will be accounted for in the balance sheet although they are only a possibility for such liabilities to occur, even they are potential. Even so, the revenues will be accounted for in the financial statements if the business is having title for revenue like that and cash or other assets have been already collected in the future. But however, the revenue will not be accounted for in the accounting books if there is a doubt about whether it is a strong legal basis to recognize that revenue. This concept surely makes business can be seen how far it provisions for potential losses so that it can be anticipated to find the solution out.

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