What's The Deal With Accounting?

By: Cathy Howard


Accounting is the main language used in business. Accounting information is utilized in communicating the affairs of a business unit to others, especially those who own or manage it. This information must be carefully recorded, classified, collapsed and presented. Accounting uses several concepts to make the language send out the same meaning to all people. A few of them are given below:
First, the Business Entity Concept. From the viewpoint of accounting, there is a distinction between the business and the person who owns it. This permits the recording of transactions of the business with the owner. Without this distinction, affairs of this kind will not be recorded and available.
Second, is the Cost Concept. Transactions are written down in the book of accounts with the actual amounts. For example, if a firm procures a piece of land for $5000, but considers it to be worth $6000, the purchase will be written down as $5000 and not any more, or less.
This is one of the most important concepts - it prevents arbitrary values being put on transactions, chiefly those resulting in acquisition of assets. Another way of saying the same thing would be that the amount to be recorded is objectively arrived at as a result of the mutual agreement of the two parties involved.

Sometimes it is inevitable that accountants have to be content with just a rough estimate, especially when what is included is the amount of depreciation to be charged each year in respect of things, which tend to depreciate. Obviously, the amount can only be an estimate because the future life of the machinery cannot be exactly computed.
Third is the Money Measurement Concept. Accounting records only those transactions, which are expressed in monetary terms, though quantitative records are also kept. An event, even though important, like a quarrel between the production manager and the sale manager, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy.

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