Final accounts – an understanding – Importance of basic concepts
In the last two uploads, as shared in the Learning & Development group, I had shared the basic concepts of financial accounting. A question arises – Why are these important?
The basic concepts are derived from the basic principles of accounting. These indicate a normal working of the business entity. By this virtue, the normal rules of functioning will apply. The moment any business entity goes into an abnormal state, like incurring major losses, or a sudden windfall, the rules of operation will change.
Big businesses invite the common man to contribute to the funding of the business, by way of purchase of shares / equity. There have been a lot of instances, where some scrupulous business promoters collected this money, misutilized it and either vanished or declared insolvency for the company.
These basic concepts become the fundamental premises for a normal operation, giving various governments and legal entities an edge to control and protect the public from abnormal situations.
A deviation from these basic concepts acts like a red signal, needing investigation and intervention.
These concepts are the prudence built over a large period of the evolution of the business, the accounting world and the society at large.