Introduction
Accounting concepts are those accounting rules that should be followed in general accounting and in preparing financial statements in accordance with International Financial Reporting Standards IAS/IFRS (Qi, 2023). These are extremely important, which is why all accountants and auditors should be aware of these concepts and strictly follow them in the course of their duties (Schroeder, Clark, and Cathey, 2022). The accounting concept defines the priority directions of accounting and reporting development. It is aimed at enhancing the quality of information generated in financial statements and reporting and ensuring guaranteed access to it for interested parties (Turner, Weickgenannt, and Copeland, 2022). Thus, it is essential to explain the accounting concepts of accrual basis, matching principle, going concern, consistency, and materiality, as well as examples of their application.
Accrual Basis Concept
In the context of globalization, the need for competitiveness and transparency in the economy is becoming increasingly important. It is crucial to notice that one of the conventions that can be used for accounting is the accrual basis (Kranacher and Riley, 2019). The accrual basis is the basis of all accounting and is used to document transactions (Zhang, 2018). However, the concept is used when preparing financial statements for transactions that take place in cash and non-cash form (Song, Wang and Zhu, 2018). Furthermore, one of the features of this accounting concept is that it records a transaction regardless of when the actual cash transaction takes place.
Accordingly, the accrual basis accounting concept is designed to provide an accurate picture of the financial position of organizations because it allows for the immediate recording of income and expenses. An example of this concept is when a company that provides digital services through a subscription system has sold them to people (Palepu et al., 2020). Thus, when customers purchase an annual subscription in January, they pay the full amount for the entire year, and the company receives it. Accordingly, on an accrual basis, the company receives revenue in December for all months in advance and immediately includes these funds in the financial statements (Stolowy and Paugam, 2018). This approach ensures that the company’s financial statements accurately reflect the economic activity associated with the subscription by matching revenue to the services provided.
Matching Concept
The matching concept is an accounting concept based on the principle of accurate accrual. Therefore, the basis of the concept is that for an accurate financial report, it is necessary to ensure that expenses match revenues during the same reporting period (Robinson, 2020). Thus, it is possible to demonstrate to stakeholders that costs do not exceed revenues and that the relationship between them is in a favorable balance (Schroeder, Clark, and Cathey, 2022).
For instance, consider a retail store that sells phones and buys a large batch of phones in November to be ready for the demand of customers during the New Year holidays (Roychowdhury, Shroff, and Verdi, 2019). Accordingly, the store will be able to sell these phones only in December, and the funds were spent on them earlier. Thus, according to the matching concept, expenses for goods should be recognized in the same period as income, regardless of the receipt of these funds (Reid et al., 2019). Hence, the principle of cost matching enables the estimation of the profitability of the store and its dynamics during the New Year holidays.
Going Concern Concept
In contrast to the previous accounting concepts used for financial statements, the going concern concept is based on the reverse of the principles. The concept states that an organization’s operations should be recognized as successful unless there is evidence to the contrary (Hoitash and Hoitash, 2018). However, the going concern concept significantly impacts the valuation of assets and liabilities (Yang, 2022). For instance, a company is in financial difficulties because the cost of raw materials has increased while the value of its products has decreased (Lim, Chalmers, and Hanlon, 2018).
According to the going concern concept, accountants should prepare financial statements with the assumption that the company will continue to exist in the future and will be able to overcome the financial crisis. As a result, in practice, a company does not recognize the value of long-lived assets but reports them in the financial statements (Lev, 2018). Therefore, the concept is needed in order to create financial statements that reflect the company’s real situation and potential.
Consistency Concept
It is essential to compare different financial periods for accounting to create financial forecasts. Consequently, the concept of consistency allows for this possibility by using the same accounting principles and methods for similar transactions over a long period of time (Sukotjo and Soenarno, 2018). For example, when a company changes from the straight-line method to the double-balance method, it should explain the difference and the reasons for the change in the financial statement (Hadiyanto, Puspitasari and Ghani, 2018). Therefore, it will allow us to make adjustments to the accounting methods and compare the numbers for different periods. In addition, if the company does not use the consistency principle, investors and stakeholders will not be able to evaluate its financial performance and determine the success of investments in the company’s operations.
Materiality Concept
Another concept that accountants use when preparing financial statements is the materiality concept. The main feature of this method is that some financial statement figures can be presented separately to ensure the accuracy of the results (Bergmann, Fuchs, and Schuler, 2019). This implies that only items that are important enough to influence the decision-making of financial statement users should be disclosed separately, while immaterial items can be aggregated or omitted.
For instance, a manufacturing company has small expenses for end-of-line equipment and can, therefore, combine them with other business expenses (Weygandt, Kimmel, and Aly, 2020). The reason is that compared to other expenses, they are insignificant and do not significantly impact the company’s operations. Consequently, accountants may not explain the costs of each type of concessionary product but only indicate their category (Wahlen, Baginski, and Bradshaw, 2022). Therefore, this helps to avoid unnecessary clutter in the financial report and does not affect the overall accuracy of the data.
Conclusion
In summary, the accrual basis of accounting and the matching principle emphasizes the precise timing of revenue and expense recognition. At the same time, the assumption of going concern ensures a realistic assessment of the entity’s ability to operate. Consistency provides meaningful over-time comparisons, and materiality highlights important disclosures, enhancing the relevance of financial statements to stakeholders. Together, these concepts enhance the transparency, comparability, and usefulness of financial information for business decision-makers.
Reference List
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