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Accounting
Concepts
Understanding
certain key accounting concepts is critical to a comprehensive understanding
of financial statements. Basic accounting concepts include:
- The
Business Entity. A corporation is a business entity separate and
distinct from its owners.
- The
Going Concern Concept. Financial statements are prepared based on
an assumption that the company is a going concern. If the auditor has
questions about the viability of the company, that information will
be reflected in its opinion letter.
- Historical
Cost Basis. Most fixed assets are recorded at their historical cost
less accumulated depreciation. As a result, the value of an asset as
recorded on the balance sheet may have little in common with the market
value of that asset.
- Conservatism
Principle. This principle states that given a choice of options,
an independent accountant must select an accounting method that has
the least favorable impact on the net income or asset value of the company
being audited.
- The
Matching Principle. It states that a company must determine revenue,
and match the appropriate costs against that revenue. A goal of the
matching principle is to make certain companies do not overstate profits
by recording a sale but failing to record the expenses associated with
making that sale.
- Full
Disclosure Requirement. A requirement that the company disclose
all facts relevant to readers of financial statements.
- The
Consistency Principle. It states that companies must normally use
the same accounting method from period to period so the company's financial
condition can be compared over time.
- The
Objective Evidence Requirement. The requirement involves the fact
that financial statements must be based on documentation that reasonable
people would interpret in similar ways.
- The
Monetary Unit Assumption. All financial records must reflect foreign
currency translations into a business's home currency.
- Materiality.
Only items that are of sufficient size to be relevant to the reader
of a company's financial statements will be included in the financial
statements and footnotes.
Source:
"Credit and Collection Manager's Manual" edited by Michael Dennis
and Steven Kozack.
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