Effect of Accounting Concepts on Financial Statement
THE EFFECTS OF ACCOUNTING CONCEPTS ON FINANCIAL STATEMENT
5.1 ENTITY CONCEPT
The first accounting concept is entity concept. These concept shows 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 owners. This is because what whatever amount the company owes to others is not the liabilities of the owners. The maximum amount that the owner is going to lose is up to the amount he has invested in the company only. Therefore, this concept insured the owner’s own properties are not taken by third parties.
In other words, entity concept helps the accountant relate events to clearly defined area accountability. As an example, do not confuse business entities with personal entities. A purchase of groceries for merchandise inventory is an accounting transaction of a grocery store which is the business entity, but the store owner’s purchase of a stereo set with a personal check is a transaction of the owner which is the personal entity.
Financial transactions from one person or group of people should be isolated from other unrelated transactions from the same person or group. For example, a sole trader may be withdrawing money for their salary but this would be classed as two transactions because the owner is receiving money and the business is paying out money. Accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees. I think this concept is important in financial accounting because is easier for owners to know what they owned themselves and how much benefit they made.
5.2 GOING CONCERN CONCEPT
Next is about the going concern or continuity concept. This concept shows that an 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
5.1 ENTITY CONCEPT
The first accounting concept is entity concept. These concept shows 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 owners. This is because what whatever amount the company owes to others is not the liabilities of the owners. The maximum amount that the owner is going to lose is up to the amount he has invested in the company only. Therefore, this concept insured the owner’s own properties are not taken by third parties.
In other words, entity concept helps the accountant relate events to clearly defined area accountability. As an example, do not confuse business entities with personal entities. A purchase of groceries for merchandise inventory is an accounting transaction of a grocery store which is the business entity, but the store owner’s purchase of a stereo set with a personal check is a transaction of the owner which is the personal entity.
Financial transactions from one person or group of people should be isolated from other unrelated transactions from the same person or group. For example, a sole trader may be withdrawing money for their salary but this would be classed as two transactions because the owner is receiving money and the business is paying out money. Accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees. I think this concept is important in financial accounting because is easier for owners to know what they owned themselves and how much benefit they made.
5.2 GOING CONCERN CONCEPT
Next is about the going concern or continuity concept. This concept shows that an 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