Accounting Concepts and Conventions

Various accounting texts deal with the fundamental concepts of accounting giving concise definitions well-suited to our purpose (1,2). 

Accounting methods in use today had their origin in the fourteenth century in what is now Italy (3). Fibonacci introduced the dual-aspect concept, and the Medicis made the system more efficient. The basis of these methods is called double-entry bookkeeping, which in the simplest terms is expressed as follows  

Assets are economic resources that are owned by the firm and are expected to benefit future operations. Assets are items of value and may be tangible (equipment, buildings, furniture, etc.). Or, assets may be intangible (franchises, patents, trademarks, etc.). 

Equities are claims against the firm. They may be divided into liabilities and owners equity. Therefore, the equation above becomes  

Liabilities are outside claims against the assets of the firm. They are obligations to convey assets or to perform services, and they require settlement in the future. If the liabilities are deducted from the assets, the difference is the amount belonging to the firm s owners (e.g., stockholders) and is called owners equity. 

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Accounting Concepts and Conventions Accounting is based on the following concepts (1) money measurement, (2) business entity, (3) going concern, (4) cost, and (5) matching. 

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