CAT T3,T6 and ACCA F3-Accounting concepts

In preparing accounting statements,whether they are external "financial accounts" or internally-focused "management accounts",it is essential that the accounts depict a "true and fair view".To support the application of the "true and fair view",accounting has adopted certain concepts that help to ensure that accounting information is presented accurately and consistently.These are rules and guidelines that the accountant lives by.All formal accounting statements should be created,perserved and presented according to the accounting concepts.

The accounting concepts are included in CAT paper 3 and ACCA F3 as knowledge to students.Students need to understand all the accounting concepts and be able to explain it.In CAT paper 6 or ACCA F7,these accounting concepts are then applied when preparing financial statements.Therefore,I will explain the concepts that students should understand.

Firstly,let's consider business entity concept.According to this concept,business should be separated from owners.For example,when the owner withdraws money from the business for personal use,this is accounted separately in the drawing account and deducted from the capital.

Next,we will consider going concern concept.According to this concept,business should be assumed that it is continuing its operations for the foreseeable future.Accountants should not draw the accounts on "winding up" basis.For example,we will record the cost of the non-current assets into account but not the residual value of it.

Next,we will consider historical cost concept.According to this concept,transactions should be recorded at the original costs.In this concept,only the costs paid to acquire asset are relevant and thus should be the only costs to be shown in the accounts.Historical cost is useful when there is no inflation.

Beside that,we also follow monetary measurement concept.Accountants do not account for items unless they can be quantified in monetary terms.Items that are not accounted for include things like workforce skill,morale,market leadership,brand recognition,quality management and more.

One important concept to follow is the materiality concept.In this concept,accountants should concern themselves only the matters that are significant because of their size and should not consider trivial matters.For example,$100 for an individual would be important and MATERIAL,but it would be IMMATERIAL for multinational company.Therefore if the multinational company found that their account is not balance by $100,they may just leave it aside as it is not material for them.

In preparing financial statement,we should follow prudence concept too.Whenever there are alternative procedures or values,accountant will choose the one that results in a lower profit,a lower asset value and a higher liability value.The concept is summarised by the well known phrase "anticipate no profit and provide for all possible losses".

Accrual concept is also an important concept to follow.This concept basically means recognise income when it is earned not when the money is received and recognise expenses when it is incurred not when the money is paid.Sometime,this concept also known as matching concept which means income should be properly matched with the expenses incurred to earn that income in a given accounting period.

Do you know that we always follow duality concept?This is the very foundation of the universally applicable double entry book keeping system and it stems from the fact that every transaction has a dual effect on the position of a business as recorded in the accounts.This concept is on the basis of the accounting equation which is assets=capital+liabilities

Although there are still some concepts which I didn't explain but I had explain most of the common one.Students should be able to explain all of these if it was asked in the exam.Don't memorise but understand all,let the concepts stay in your mind forever because you are going to follow it in preparing financial statements for the exam and for the future as these concepts are important so that financial statements are produced with "true and fair view".Remember auditor will produce the audit report for your organisation only if your financial statements show "true and fair view".

Therefore learn the concepts as knowledge in CAT T3 or ACCA F3 before able to produce correct financial statements in CAT T6.ACCA F7 and P2.These were basics to understand :)