Eleven Key Accounting Concepts

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ELEVEN KEY ACCOUNTING CONCEPTS

Entity: Accounts are kept for entities and not the people who own or run the company. Even in proprietorships and partnerships, the accounts for the business must be kept separate from those of the owner(s). This means that if you own a business, you cannot use your personla checking account for the business. The business must have its own account.

Money-Measurement: For an accounting record to be made it must be able to be expressed in monetary terms. For this reason, financial statements show only a limited picture of the business. For example, if there is a labor strike, the company is definitely affected, but this is not shown on the financial statement. On the other hand, if the company engages in a "Like" exchange, that is, it exchanges goods for goods, this is shown on the financial statement. Good for good exchanges are shown on the financial statement because the goods definitely have market values.

Going Concern: Accounting assumes that an entity will continue to operate indefinitely. This concept implies that financial statements do not represent a company's worth if its assets were to be liquidated, but rather that the assets will be used in future operations. This concept also allows businesses to spread (amortize) the cost of an asset over its expected useful life. Even if a business is expected to last ten years, from an accounting perspective, the financial documents are treated as if the business is expected to last forever.

Cost: An asset (something that is owned by the company) is entered into the accounting records at the price paid to acquire it. Because the ...