Accounting Concepts Overview

Business Entity Concept

• When a company is incorporated, it is legally distinct from its owners.
• The company carries out all business activities on behalf of its owners.
• The accounting system tracks and reports on the company's performance, separate from its owner’s personal affairs.

Going Concern Assumption

• Assumes the company is financially sustainable and will continue operating in the foreseeable future.
• Allows for the use of existing assets for their intended purpose.

Accounting Period Assumption

• The lifespan of a company can be divided into equal time periods called "Accounting Periods".
• These periods are typically one month, three months, or one year.
• The default is one-year, starting January 1st and ending December 31st.

Stable Monetary Unit Assumption

• Accounting uses currency (e.g. USorCD or CDorCD) as the primary unit of measurement.
• Assumes the purchasing power of currency is stable over time, allowing for comparisons across different reporting periods.

Financial Accounting Information System

• The system is based on the accounting equation: Assets = Liabilities + Owner's Equity
• It uses financial statement elements: Revenue, Expenses, Assets, Liabilities, and Owner’s Equity (including capital and retained earnings).

Business Transaction

• Legally binding agreement between the company and a third party.
• Involves the exchange of resources (goods, services, cash, assets).
• Results in two opposite sides of equal monetary value: resources surrendered and resources received.

Transaction Requirements

• The agreement is executed by at least one party.
• The monetary value of exchanged resources is known and measurable.
• The agreement will impact the company's financial position.
• The agreement directly affects the company's performance.