Accounting is the main lingo used in business. Accounting information is effective in communicating the affairs of a business unit to others, including those who own or run it. Accounting information must be carefully recorded, classified, collapsed and presented. As a language, accounting utilizes several concepts to make the language give out the same meaning to all people. Here are a few of them:
First, the Business Entity Concept. From the viewpoint of accounting, a business is different from the person who owns it. This allows the recording of transactions of the business with the proprietor. Without this difference, affairs of this nature will not be available.
Second, is the Cost Concept. Transactions are encoded in the book of accounts with the amounts actually involved. For instance, a firm purchases a piece of land for $5000, but considers it to be worth $6000. The purchase will be written down as $5000 and not any more.
This is one of the most important concepts - it prevents arbitrary values being put on transactions, chiefly those resulting in acquisition of assets. Another way of saying the same thing would be that the amount to be recorded is objectively arrived at as a result of the mutual agreement of the two parties involved.
Of course, sometimes, accountants have to be satisfied with just an estimate- the amount of depreciation to be charged each year in respect of machinery is an example. The amount has to be an estimate since the future life of the machinery cannot be known precisely.
Third is the Money Measurement Concept. Accounting includes in the record the transactions that are valued in monetary terms alone, though quantitative records are also kept. An event, although just as important, like a fight between middle managers, will not be included unless its monetary effect can be measured and its implications recorded.
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