Accounting concepts can be described
as the accounting rules that should be follow while preparing the financial
statements and accounts. Five (5) fundamental concepts when preparing Financial
Statements are as follows:
1) Accrual concept:
The accrual concept in accounting implies that expenses and
revenues are recorded in the period they happen, regardless of whether cash is
included. The advantage of the accrual approach is that financial statements mirror
the entire expenses related with the details revenues in an accounting period.
Once a business gets or generate cash payments, it inverts the accrual
accounting entries and trace all the cash transactions (Basu, n.d.).
2) Consistency concept:
Consistency concept implies that accounting methods once
received should be applied reliably in future. It means that a business must avoid
from changing its accounting arrangement unless on sensible grounds. Consistency concept is vital because
of the requirement for comparability, that is, it empowers investors and other
clients of financial statements to effectively and accurately compare the
financial statements of an organization (Jan, 2013).
3) Going concern:
Going concern essentially implies that a company will proceed
with its business operations in future and right now there is no purpose to trust
that the business operations of the company will reach an end. The financial
statements are ordinarily arranged on the suspicion which an enterprise is a
going concern and will proceed its operations for a long time in future.
This concept the assets of a
company can be labelled into fixed assets as well as current assets (Singh,
4) Prudence concept:
Accounting transactions and different occasions are some of
the time unclear yet with a specific end goal to be important we need to report
them in time. We should make evaluations expecting judgment to counter the vulnerability.
Prudence is a key accounting concept which ensures that assets and income are
not overestimated, and liabilities and expenses are not undervalued (Jan, n.d.).
5) Money measurement concept:
Money measurement concept expresses that all accounting
records must be made as far as monetary units. All transactions are stated in
monetary units and recorded in the books of accounts in terms of cash which is normally
the currency unit utilized in the nation. Another essential part of the money
measurement concept is an expectation regarding the stability of the value of
the monetary unit (Play Accounting, n.d.).
Book of prime entry can be described
as a book or record that certain kinds of transaction are recorded. The most
familiar books of prime entry are the sales day book, sales returns book,
purchase day book and purchase returns book.
Sales Day Book
day book is a book of original entry that subtle elements of credit sales of
goods are listed by a business organization. Aggregate of sales book demonstrates
the total credit sales of goods amid the period concerned. Normally the sales
book is calculated/totaled every month. The sales day book is composed up every
day from the copies of invoices issued. The fundamental data recorded in sales
day book is client name, receipt number, receipt date and receipt amount (Rafique,
Purchase Day Book
day book is a book of original entry maintained to note credit buys. Cash
purchases won’t be entered in purchases day book since entries in regard of
cash purchases should be entered in the cash book. Toward the end of every month,
the purchases book is totaled. The total demonstrates the sum amount of goods
acquired on credit. Purchases book is composed every day from the invoices
issued. The essential data recorded in purchases day book is transaction date,
name of the provider, provider invoice number and provider invoice amount (Bragg,
Sales Returns Day Book
A sales return is the goods sent back
by a purchaser to the merchant, usually for some reasons like abundance amount
ordered, wrong items delivered and damaged goods. The vender records and entered
this return as a debit to a Sales Returns account and a credit to the Accounts
Receivable account. The credit to the Accounts Receivable record diminishes the
value of accounts receivable outstanding (Bragg, 2017).
Purchases Returns Book
returns book is a book that the goods/ merchandise which returned to the suppliers
are recorded. It is also known returns outward book or purchases returns day
book. Goods or merchandise might be returned since they are of a wrong kind or
not up to test either because they are damaged or harmed. The total of the
purchases returns or returns outwards book is recorded to returns outward
account or purchases return account. Singular suppliers to whom merchandise are
returned are debited because they get the good (Ahmed, n.d.).
Differences between Trade Discount
and Cash Discount.
A trade discount is a decrease allowed
by the suppliers of products/benefits on the list or catalog costs of the goods
provided. It is given because of business thought, for examples, transactions
process, vast amount orders and others. Trade discount is not independently
recorded in the books of accounts, and all sums stated in a purchases or sale
book are done in the net amount as it were. Moreover, trade discount is granted
on both credit and cash transactions. Trade discount is given based on
a cash discount is a reduction granted from a supplier of goods and provider of
services to the purchaser from the invoice price. It is given as a motivator or
an inspiration in return of paying a bill inside a predetermined time. Cash
discount is demonstrated independently in the books of accounts. It is recorded
as a costs/ expenses in the Profit and Loss A/C. Furthermore, cash discount is
just granted on cash installments and it is given based on payment (AccountingCapital,
Example of Trade discount:
vehicles were bought by Madrid Private Limited with a 10% trade discount on the
list price of 1,00,000 each.
List Price = 15 x 1,00,000 = 1,500,000
discount = 10% of 1,500,000 = 150,000
Invoice Price after trade discount = 1,500,000 – 150,000 = 1,350,000
Example of Cash discount:
Let’s we proceed with the example for
the trade discount above. Let expect that the supplier, expanded a cash
discount of 3% 10 Net 30 Days. This implies if the buyer pays within 10 days of
delivery, they can benefit an additional 3% discount on the Invoice price.
price = 1,350,000
of 1,350,000 = 40,500
amount to be paid within 10 days = 1,350,000 – 40,500 = 1,309,500