Accounting – Accounting Concepts
We wrote about four basic concept of accounting, i.e. going concern, business entity, money measurement, cost concept and the dual-entry concept.
The sixth concept is the Realization concept– Each transaction should have actually been executed and the related money realized / realizable.
The key theory behind this concept recognizes that accounting is a historical record of transactions, and the recording needs to be done at the realized / realizable value. Well, this is sometimes confusing because you may argue that realizable value may vary or change.
Actually by using the term realizable, we do not imply anticipated value, but actual value agreed to be transacted in, where the monetary consideration will be completed in future at a value already agreed to at the time of the transaction.
So, a dealer of television sets sells you a television, agreeing to take the total value after thirty days, a value which was decided when you bought the product, will be a good example of realizable.
If you permit businesses to use anticipated values, they may actually end up defrauding its investors / business connects by inflating profits / losses by using inflated values.
One last concept and then we will move on……
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