Question

Define the following accounting concepts and explain for each their implications for the preparation of financial statement

1. business entity concept
2. going concern
3. materiality
4. fair representation

Answer 1

1. Business entity concept states that the business is a separate entity and that it is different from its owners. The implication of this is that the accounting records have to be maintained separately.

2. Going concern concept states that the business will exist for a longer time period. The implication of the going concern is that the accounts should be futuristic and forward looking.

3. Materiality states that the important financial transactions should only be recorded and the smaller transactions can be ignored. The implication of this is that many smaller transactions will be missed and not recorded.

4. Fair representation: This concept states that the accounting records of the company should give the details about the financial transactions of the company in a fair manner i.e. no data should be fabricated or falsely stated in the accounts records. It implies that all data should be true.