Important Accounting Concepts in Financial Statements


Firms need to follow certain principles to avoid bias and ensure accuracy in producing financial statements. Any business aims at making profits to survive in competitive markets; therefore, preparing factual financial information is vital in attaining this aim. Financial reports show an institution’s economic health, thus facilitating a proper intervention in the organization. Many accounting concepts are crucial in preparing accurate and acceptable financial records.

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A business should only document an office operation if it is expressable in monetary terms, as emphasized in the money measurement concept. Therefore, the accounting concept accentuates quantitative rather than qualitative data (Jiambalvo, 2019). Thus, many firms miss expressing many items in their financial statement because they cannot be expressed in monetary form. Examples of such things include employee skill level, product durability, quality of customer support, administrative process efficiency, and employee working conditions. Despite the flaw that these factors are not expressed in financial statements, they impact long-term business changes, and the money measurement principle is vital in preparing financial reports (Elliott & Elliott, 2019). Since money is the easiest way of recording transactions about losses, income, assets, liabilities, and capital, the money measurement concept becomes crucial in estimating a company’s valuation based on monetary terms (Weygandt, Kimmel, and Kieso, 2018). I documented all the monetary transactions in preparing a balance sheet for organization X. It is crucial to prepare balance sheets and a profit and loss account for organization X to determine its financial health.

The historical cost concept stresses asset’s value is recorded on fiscal statements based on its acquisition values. The approach is crucial in preparing balance sheets as most long-term resources, such as land and machinery, are recorded based on the original cost the company acquired (Weygandt, Kimmel, and Kieso, 2018). It is based on conservative accounting that aims at not overestimating the value of an asset. It ignores the fact that the value of an investment may have appreciated over time. For example, when I was preparing a balance sheet, company B bought land for $100,000 in 1918 and established its main headquarters, the current value currently stands at $30 million, yet in the balance sheet, I recorded it as $100,000. Concerning accounting conservatism, documenting asset depreciation helps account for long-term assets’ wear and tear (Rao, 2021). The accumulated annual depreciation is noted under historical cost in a balance sheet; then, the accumulated depreciation is subtracted from historical cost.

The going concern concept shows a firm will continue functioning for the predictable future. Thus, it stresses that the company has no goal of selling off its assets to cease operations because of financial stability (Robinson, 2020). Such a sale arises when a business is in a financial crisis and requires money to finance its creditors, selling off part of its assets. The going concern concept determines the reporting reflected in fiscal statements. Accountants who view a business as a going concern believe that it wisely uses resources and does not have to liquidate (Narayanaswamy, 2022). An auditor may examine the profit and loss statements to determine if a firm can endure as a going concern for one more financial year after the audit time. I used the concept to prepare company Y’s profit and financial loss sheets despite the impeding COVID-19 pandemic.

The basis is double-entry accounting, which is vital for preparing reliable financial reports. The dual aspect concept assists accountants in recognizing that an organization’s transaction involves double aspects that impact the balance sheet (Budhathok, 2020). For example, a farmer’s purchase of a tractor increases long-term assets and decreases short-term assets, such as cash in the bank. In preparing a balance sheet for company X, I considered business owner repaying a loan reduced the money in the bank but decreased the loan liability. The dual accounting equation is realized in the balance sheet, where an organization’s assets must equal the liabilities plus the equity. A business transaction may affect the assets, liabilities, and equity, and the corporate must accept the dual concept to enhance reliability.

The stable monetary unit concept highlights that the money value of money is constant with time. Thus, the accountants can neglect the impact of inflation, assuming that financial reports are not updated even if the monetary values substantially change (Rao, 2021). For example, in balance sheets, the approach dictates that there should be consistency in calculating the depreciation of assets during each financial year. It limits the chance of misinterpretation and misrepresentation of the assets in the following financial years. The concept also assumes that the dollar’s value is constant throughout all the financial years (Adrian, Laxton, and Obstfeld, 2018). Because of this assumption, there is no updating of the past financial records if the dollar’s value varies with time. The concept allowed me not to update the previous year’s balance sheets I had calculated despite the inflation experienced during the COVID-19 pandemic.

The objectivity concept helps a company’s financial statements to be built on firm evidence. Thus, it helps to eradicate the possibility of the accounting team producing financial reports based on their opinions and biases (Warren, Jonick, and Schneider, 2020). The outside editors will require firms to make a financial statement per the objectivity principle to regard the information on the financial documents as accurate. Therefore, the auditor may disregard profit and loss statements not based on objectivity and raise more questions about the firm’s accounting reliability (Robinson, 2020). If a firm does not own a fixed asset, for example, machinery, the company should avoid documenting it in its financial statements. Accounting documentation helps an organization get financial data concerning cash flows, performance, and financial position (Turner, Weickgenannt, and Copeland, 2020). The objectivity concept assisted me in understanding the significance of basing financial documents on evidence to reduce bias.


In conclusion, many principles help in preparing financial statements. The going concern concept may be used in financial statements to establish how a company should undertake expense reduction, asset sales, or migration to a different product. Organizations can know if they are making losses or profits using the monetary measurement concept. The historic cost helps avoid overestimating or underestimating an asset in financial documents. Therefore, accounting concepts assist organizations in producing reliable financial documents. Every accountant should incorporate these accounting concepts in daily financial statement preparation.

Reference List

Adrian, T., Laxton, M.D. and Obstfeld, M.M., 2018. Advancing the frontiers of monetary policy. International Monetary Fund.

Budhathok, Dr.N.B. (2020). Accounting concepts, 8, pp.6–9.

Elliott, B. and Elliott, J. (2019). Financial accounting and reporting. Pearson.

Jiambalvo, J., 2019. Managerial accounting. John Wiley & Sons.

Narayanaswamy, R., 2022. Financial accounting: a managerial perspective. PHI Learning Pvt. Ltd.

Rao, P.M., 2021. Financial statement analysis and reporting. PHI Learning Pvt. Ltd.

Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.

Turner, L., Weickgenannt, A.B. and Copeland, M.K., 2020. Accounting information systems: controls and processes. John Wiley & Sons.

Warren, C.S., Jonick, C. and Schneider, J., 2020. Financial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2018. Financial accounting with international financial reporting standards. John Wiley & Sons.

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