Remember the last time you sat down to write that paper on accounts? You couldn’t sleep for nights on a stretch. While you had understood the question after a little bit of help from your friends and teachers, what you didn’t realize was that writing it is going to take that long. And to think that it was only a 1000-word assignment!
So why did it take you almost three weeks of sleepless nights to complete it when it should have been over in just about a week? Well, my friend, the problem was your poor knowledge of the basic accounting concepts and principles. Researching these concepts and principles and understanding them before you could incorporate them into your assignment the right way is what caused you to stay awake into the wee hours of the morning.
The lack of such basic knowledge can make you feel like a lost man at sea who has no idea where he is going. Luckily for you, in this blog, we will be briefing you on the important concepts as well principles of accounting and will then go on to explain why you should know about them so that you can ace all your accounting assignments of the future like a wiz.
Note: For your convenience, the blog has been divided into three separate sections.
The 5 Most Crucial Concepts of Accounting
In the first section of our blog, we are going to give you the lowdown on the five basic concepts of accounting that should be drilled into your mind if you want academic success. We will explain each concept in brief so that you get a clear idea.
1. Concept of Money Measurement
The first one on our list is money measurement. According to this concept, you should keep a record of only those transactions while accounting which can be represented in terms of their monetary value and exclude those that cannot be quantified. Every business transaction that takes place should always be mentioned in terms of money at all times. Basically what this concept implies is that certain factors such as labor unrest, sales policies, etc. do not come under accounting even though they are relevant to the sound operation of a business. A limitation of this concept is that it keeps the value of money as a constant even though it is liable to change with the changes in the market.
2. Concept of Business Entity
This is an important concept, and its aim is to make you understand that there is a difference between the business and the proprietor. This, in turn, means that the personal expenses of the proprietor should not be mixed into the account records of the firm he owns as those are two separate entities. However, mention should be made of them. You should keep in mind that the role of the proprietor is restricted to being the creditor of the firm, one who provides capital for investment in the business concerned. This concept can help you to discover the earning capacity of the firm concerned.
3. Concept of Going Concern
This concept can give you an idea of the longevity of the business concerned. All businesses are technically supposed to last for an indefinable period. To make things easier for the purpose of accounting, it is taken for granted that all firms (big or small) come under the purview of the going concern concept, wherein there is no concrete evidence to support that they won’t last. However, this is only applicable for those businesses, which are making a profit. All reports on accounting are fashioned on the basis of this concept.
4. Concept of Cost
The concept of cost entails the recording of all fixed assets at the prices they were purchased. The price that the firm paid to get these assets is defined as cost. This future recording of expenditure on these assets is based on this initial cost. So at the end of every year, the price of the fixed asset in the accounts record would be constant. However, the amount changes in the balance sheet and is represented as at its cost price minus the depreciation, and this figure is known as book value. It is important to note here that if a company has not purchased its assets, then they won’t feature in its accounting records.
5. Concept of Dual Aspect
This one is also referred to as the concept of accounting equation, and its purpose is to establish the fact that every business follows the dual aspect model of transaction. These dual aspects are:
- Production of benefit
- The offering of the benefit
Let us explain further. For example, when a transaction takes place, there are two parties involved – the giver and the receiver. Both these parties benefit in the aftermath of a transaction. The giving party gets money (while foregoing his goods) and the receiving party gets the desired item (while parting with his money). This implies that an equal transaction takes place between the giver and the receiver, and will entail a double entry into the accounts record.
There are other concepts that you should be familiar with too including accounting period, realization, objectivity, accrual and many more.
The Top 5 Principles of Accounting
Just as knowledge of the basic concepts of accounting is important so is that of its principles. These principles influence every accounting activity that takes place, and if you want your accounts report to be accurate, you need to know them. Here are the top 5:
1. The Principle of Matching
This principle applies to accrual accounting, and according to it the value of the money spent on an item against its end value has to be accounted for. For example, if you decide to sell your house but you get it fixed before selling it, its value will automatically increase. It’s this increased value that has to be accounted for.
2. The Principle of Cash
The cash principle involves the recording of all the expenses and incomes of a business as and when they are received. Maintaining such an accounting record can take months, which is why it is not always used but only under special circumstances.
3. The Principle of Consistency
This is the most straightforward principle used in accounting and is very easy to understand. According to this principle, it is vital for any existing business to select just one single method of accounting for all its expenses and incomes and stick to it. So that means when you are maintaining the records of a single firm, you have to be sure that you use the same method throughout.
4. The Principle of Full Disclosure
The principle of full disclosure states that every piece of information pertinent to maintaining the accounts of a business has to be furnished by the authorities concerned. This helps in maintaining complete accuracy. Clients should be careful when providing information, or the end reports and files can turn out to be wrong.
5. The Principle of Monetary Unit
A business can have transactions with international clients as well, and those dealings, in all likelihood, will take place in the currency of the country concerned (and not in the home country of the business). According to the principle of monetary unit, these transactions have to be mentioned in the currency of the home country of the business rather than the country where the cash came from. This helps in maintaining consistency and makes it easier to calculate expenses and incomes.
Now that we are clear on the basic concepts as well as the principles of accounting, it is time for us to move on to the next section of our blog. Here we will be discussing why you need to know these fundamentals if you want to ace your next accounts assignment.
How These Concepts and Principles Can Help You Write an Amazing Assignment?
Everybody stresses on the importance of practical knowledge these days and theoretical knowledge is ignored altogether. But that’s not to say that theoretical knowledge does not have its own advantages. In fact, the theoretical knowledge of all the basics of accounting can be instrumental in getting you an A-grade on your paper. Here’s how:
• You will know the answer to the question ‘why’
When you are doing an accounts assignment, you will find yourself asking this question a lot – ‘why am I doing it this way?’ The answer to that lies in the principles and concepts of accounting. Since each of your assignment will have a particular concept behind it, knowing the concept can clear out any and every confusion you may have concerning your assignment.
• You will be able to compose a richer assignment
The lack of theoretical knowledge can make your paper appear average. This is because you will not sound confident enough while writing and that will show through your assignment. To establish authority over your paper, you need to possess a strong grasp over the subject, and that can only come if you are familiar with the different concepts of accounting. You’ll witness a vast change in your tone when you know all the principles. Your paper will seem richer, and as one that’s coming from someone who knows what he is talking about.
• You will make fewer mistakes
Most of the errors you make in your assignment arise only because you still do not have much idea of what you are writing about. However, if you already have an absolute command over all the theories of accounts, you wouldn’t make any mistakes at all. On the contrary, your assignment will be loaded with useful information that is needed without you putting in much effort.
• You will save up on a lot of time
If you get down to writing your assignment without knowing what you are writing about, you’ll take up a lot of time to finish it than is normally acceptable. As a student, you are always on a tightrope when it comes to deadlines, and you cannot waste your precious time in finding out the meaning of accounting terms which you do not know about. However, if you have the requisite understanding of all the concepts and principles from beforehand, you will not be wasting time looking up their meanings at the last moment. And this knowledge will stay with you and come in handy for all future assignments as well, which means you will be saving a lot of time when doing subsequent papers.
• Complex assignments will seem simpler
Just like with the assignments of any other subject, accounting assignments have their own spectrum of difficulty levels, ranging from easy to diabolical. However, with the right information at your disposal, even the most complex assignments can turn into painless tasks. This is because theoretical knowledge deepens your understanding of accounting as a whole so that you can tackle the challenges it presents with confidence.
Theoretical knowledge of the concepts of accounting can take you a long way, and can even make your career path much smoother. However, it is important to stress here that practical knowledge should also be applied and you should have first-hand experience in maintaining accounting reports, files and book-keeping if you want to succeed. If you employ both of these approaches while studying, then nothing can stop you from excelling in all of your accounting assignments.
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