ZIMSEC O Level Principles of Accounting Notes: Introduction to Accounting Concepts

  • In the real world various measurement standards have been devised to aid communication, comparisons, trade and the sharing of ideas
  • For example units of measurement such as grams, meters, liters etc are universally used
  • We know what a kilogram looks like
  • Before the invention of these standards people had to improvise when making trades
  • This resulted in inconsistencies and difficulties when making comparisons
  • The same has happened in accounting
  • In historical times accounting was usually a self-taught discipline with various ways of doing things
  • Even when accounting evolved in the not so distant past there were frequently different alternative ways of doing things
  • How should we calculate depreciation, how do we arrive at the cost of goods sold in an inflationary world etc
  • This led to the development of accounting concepts
  • These concepts have several goals :
    1. These are meant to ensure objective and consistent reporting
    2. They also ensure that the resultant financial statements show a true and fair value
    3. They also ensure that the financial statements and underlying records are free from material error and fraud
  • These concepts are developed by the International Financial Reporting Standards Foundation
  • They are given as part of financial reporting standards
  • These standards prescribe how financial transactions are supposed to be recorded and presented
  • Accounting concepts are at the heart of these financial reporting standards
  • These standards are quite complex and make for heavy reading
  • You are not required to know them per se
  • You are only required to know the following concepts and their implication:
    1. Accrual/Matching concept
    2. Prudence concept
    3. Going concern concept
    4. Consistency concept
    5. Historical cost concept
    6. Double entry concept
  • To learn more about each concept just click/tap on it
  • It is important to note that by this time you are already familiar with most of these concepts
  • We have touched on them implicitly in the exercises and notes we have written thus far
  • Here we are only making you explicitly aware of their existence
  • You should note that while these concept are not part of the law (legal framework) their acceptance, various laws etc make them the de facto standards
  • They cannot be ignored are should be treated as the laws of accounting in as much as we have laws of physics
  • While all concepts are considered important the following concepts are considered to be fundamental concepts:
  • Going concern
  • Consistency
  • Prudence
  • Accruals
  • Materiality

To access more topics go to the Principles of Accounts Notes.

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