Accounting identifies, measures, records and communicates the financial information of an organisation to the people who use it.
Users of accounting information
Internal users: owners, management and employees. External users: investors, lenders, suppliers, customers, government and tax authorities.
Basic accounting concepts
| Concept | Meaning in one line |
|---|---|
| Business entity | The business is separate from its owner |
| Money measurement | Only transactions measurable in money are recorded |
| Going concern | The business will continue for the foreseeable future |
| Accounting period | Results are measured for fixed periods, usually a year |
| Historical cost | Assets are recorded at the price paid |
| Dual aspect | Every transaction has two effects: Assets = Liabilities + Capital |
| Revenue recognition | Revenue is recorded when it is earned |
| Matching | Expenses are matched with the revenue of the same period |
| Full disclosure | All material information is disclosed |
| Consistency | The same methods are used year after year |
| Conservatism (prudence) | Provide for all losses, do not anticipate profits |
| Materiality | Record significant items in detail |
| Objectivity | Records are supported by verifiable evidence |
Bases of accounting
- Cash basis: record only when cash is received or paid.
- Accrual basis: record income when earned and expenses when incurred, whether or not cash changes hands.
Accounting standards
Accounting Standards (AS) and Indian Accounting Standards (Ind AS, converged with IFRS) bring uniformity and comparability to financial statements.
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