The History of the Development of Accounting - Essay Example

? Financial Management and Section # of Since the birth of accounting, it has evolved through various circumstances. Once upon a time, the transactions were recorded on the basis of cash only but in 1544, double entry system of book-keeping was introduced by Luca Pacioli in his book of “Decomputis et Scriptus”. From then onwards, many consider him as the father of the accounting. (Kieso, 2009) Accounting is an art to record, classify and summarize financial transactions which are monetary in nature. These results are then interpreted in order to understand the financial position of a firm, or a department or even an industry. (Kieso, 2009) Recording includes journalizing the transactions by recording them into a daily book known as General Journal; these transactions are then posted in the ledger to separate the transaction with respect to their nature. Moreover, these are subsequently used to make financial statements at the end of the accounting cycle to gauge the performance of the firm. (Kieso, 2009) However, this all process is governed under some accounting principles that are taken into account when the transaction are recorded, posted or reused in the making of the financial statements which include balance sheet, statement of income and expenditure, statement of cash flows and statement of changes in equity. (Kieso, 2009) ACCOUNTING CONCEPTS The accounting concepts include the assumptions on which the accounting systems are based. They provide the key steps and guides towards the preparation of financial statements. “The different aspects are: 1) Business Entity Concept  2) Money Measurement Concept  3) Cost Concept  4) Going Concern Concept  5) Dual aspect Concept  6) Realization Concept  7) Accounting Period Concept1” Professional Education, Testing and Certification Organization International (1989) in Accounting II Concepts further includes three concepts more accounting concepts and principles: 8) Matching Concept 9) Materiality 10) Consistency IAS1 thoroughly discusses most of the concepts listed above such as dual aspect, going concern, accounting period, realization, materiality and consistency; however, some more concepts play an important role in the field of accounting which includes the rest of the above, as well as accounting conventions. Below, we will discuss in detail about the concepts mentioned above. Business Entity: A concept that treats business as a separate entity from that of its owners. Thus if the owner of the firm purchases a car for his personal use then that transaction would not be treated as a part of the business; however if the car would have been purchased for the business usage, then the transaction would have been recorded under the account of the business. (Kieso, 2009) Money Measurement: Accounting allows one to record only those transactions which are monetary in nature. (Kieso, 2009) For example, Apple by virtue of accounting laws can never bring the worth of Steve Jobs on the financial statements, nor it was able to reflect the expected loss in Apple’s worth after Mr. Jobs died, thus a company cannot bring the death of an employee on the financial statements since the event cannot be classified in terms of money. However, if a transaction is monetary in nature then only it can be recorded; for instance, ABC Company purchased office equipment worth $1 million, now, since the transaction is monetary in nature, the transaction can be recorded in the books of the accounts. Cost Concept: This concept requires one to record an asset at a cost at which it is acquired. For instance, if Wal-Mart was able to acquire a new land at $1 million whose market price was $2 million, then the transaction will record land at $1 million, even though the market price of land is $2 million. There are two advantages of this assumption; first being the fact that it ensures filtering of more than one possible market price, and second, being the fact that the cost can be documented and thus can be used later on, such as in auditing the records of the firm. (Kieso, 2009) Going Concern Concept: It is an assumption that a business is there to stay. It assumes that a business will stay for a long time to come and therefore the accounts are maintained keeping that in view. Thus, the portion of long-term assets on the balance sheet is based on this principle, and on the same principle, depreciation is charged on the fixed assets instead of capitalizing the total cost. Similarly, when making financial statement, it is assumed that business will continue conduct activities instead of being winded up or being merged. (Kieso, 2009) Dual Aspect: As discussed earlier at the start, accounting calls for the dual aspect of every transaction, thus every debit entry has a credit entry. Let it be a purchase on cash or credit, the transaction has two aspects in term of monetary transaction. For instance if A purchases $300 worth raw materials on credit, then Purchases will be increased and debited, while payables will also increase but credited by the same amount. Since, every transaction has dual aspect, thus the sum of all the debits is equal to credits. This aspect also plays an important role in maintaining the accuracy of the data. (Kieso, 2009) Realization Concept: The principle states that revenues shall be recognized only when they are realized. Thus answering the very question of when the revenues shall be realized. Now suppose, ABC Bakers receive an order to deliver 100kgs of biscuits at $1000, and thus, on receiving the order they recognize the revenue of $1000. Is it right for ABC bakers to do that without incurring any cost? Definitely not, logic says that since orders can be artificial as well as they don’t cost one anything thus revenues are to be recognized only after the goods are actually delivered to the customer or the service has been rendered; thus ABC Bakers will realize revenue only after it has delivered the order to its customer. This concept is commonly known as the revenue realization principle. (Kieso, 2009) Accounting Period: The life of business is indefinite (going concern principle), thus, in order to understand and study its performance, its transaction are considered in segments and then summarized on a periodic basis. Thus, the accounting period is that period after which a businessman prepares books of accounts such as balance sheet, income statement and the statement of cash flows, in order to monitor the performance of the business which is usually a year. This concept also gives birth to the concepts of revenue expenditure which pertains to only one accounting period, and capital expenditure which pertains to more than one accounting period. (Kieso, 2009) For instance, Morrison’s annual report for the year of 2009 pertains to the period from 1st February 2008 to 31st January 2009. (Morrison’s Annual Report, 2009) Matching Concept: The main objective of a business is to earn profits. In order to ascertain the performance of the business on periodic basis, profits shall be ascertained on periodic basis too. Thus the expenses are matched to the revenues accordingly, based on the period to which they pertain to- a concept known as the matching concept. The best example of this is depreciation- which aims at expensing out only that part of the asset that has actually been consumed in that period to earn the revenues. (Kieso, 2009) Assume that XYZ Company pays the office rent in advance on 5th December 2011 for the year of 2012; however this rent will not be considered as an expense in 2011, but in 2012 after the service has actually been utilized. Materiality Concept: Since, there is abundant of information that is available to accountants; thus only the relevant information shall be recorded or projected by the accountants to ensure that accounting does not become unnecessary burdened with immaterial details. Although the concept of materiality is subjective and it is therefore up to an accountant to decide what material is, and what is not, many take anything equal or above to 5% sales as material, however one also has to consider the qualitative aspects of the category. Moreover, an amount or category that may be material to one company may be immaterial to another. A common example is the presence of other assets on the balance sheet which includes all immaterial amounts whose details will only delay the process of the business. (Kieso, 2009) Furthermore, the cell phones will be considered material for the account of Nokia, while they will be considered immaterial in the case of Dell Corporation. Consistency Concept: The concept vouches for the consistency in the accounting practices, which shall remain unchanged from one period to another in order to ensure comparability of the information. For instance, there is variety of methods for charging depreciation or recording the cost of inventory, but ABC Company has always used straight-line method of depreciation to record the expense. Similarly Wal-mart uses LIFO method for its inventory valuation and it will continue to do so, to ensure that the financial statements are comparable to previous periods. (Kieso, 2009) CONCLUSION Accounting principles provide key assumptions in the execution of accounting practices that not only ensure lesser burden on the accountants but the results that are relevant to majority of the stakeholders, especially the management and the investors. The principles which are useful worldwide due to its nature that is objective and practical. BIBLIOGRAPHY Kieso, D. E., & Weygandt, J. J. (2009). Intermediate accounting. New York, Wiley. Kumar, R. (n.d.) Financial Accounting. [online] Available at: http://www.academia.edu/1207926/FINANCIAL_ACCOUNTING [Accessed: 11 Apr 2013]. Morrisons.co.uk (2009) Consolidated income statement | AR2009 | Morrisons. [online] Available at: http://www.morrisons.co.uk/Corporate/2009/annualreport/financial_statements/consolidated_income.html [Accessed: 11 Apr 2013]. Peoi.org (1989) Accounting II Concepts. [online] Available at: http://www.peoi.org/Courses/Coursesen/acc/fram1.html [Accessed: 13 Apr 2013]. Read More