2. ï Accounting concepts define the assumptions on the basis of which
financial statements of a business entity are prepared.
ï Concepts are those basic assumptions and condition which form the
basis upon which the accountancy has been laid.
ï¶ Business entity concept
ï¶ Money measurement concept
ï¶ Going concern concept
ï¶ Accounting period concept
ï¶ Accounting cost concept
ï¶ Dual aspect concept
ï¶ Matching concept
ï¶ Realisation concept
ï¶ Accrual concept
3. Business entity concept :Business entity concept is one of
the accounting concepts that states that business and the
owner are two separate entities and therefore, should be
considered separate from each other.
Example:
Suppose Mr. Birla started a business. He invested Rs 1, 00,
000. He purchased goods for Rs 50,000, furniture for Rs.
40,000, and plant and machinery for Rs. 10,000 and Rs 2000
remained in hand. These are the assets of the business and
not of the business owner. According to the business entity
concept, Rs.1,00,000 will be assumed by a business as
capital i.e. a liability of the business towards the owner of the
business.
Now suppose, he takes away Rs. 5000 cash or goods for the
same worth for his domestic purposes. This withdrawal of
cash/goods by the owner from the business is his private
expense and not the business expense. It is termed as
Drawings.
4. Money measurement concept: It states that a business should
only record an accounting transaction if it can be expressed in terms
of money. This means that the focus of accounting transactions is on
quantitative information, rather than on qualitative information.
Going concern concept: This concept assumes that the business
will continue to operate and will not stop the business activities in
the foreseeable future. Due to this reason, the financial statements
for a particular financial period are created as a part of a series and
carry the balances to the next financial period. This assumes that
the non-current assets of the organization will not be sold any time
soon and it will meet its obligations.
Accounting period concept :It states that all assets are recorded
in the books of accounts at their purchase price, which includes cost
of acquisition, transportation and installation and not at its market
price. It means that fixed assets like building, plant and machinery,
furniture, etc are recorded in the books of accounts at a price paid
for them.
5. ï Accounting cost concept :The cost principle is an accounting
principle that records assets at their respective cash amounts at
the time the asset was purchased or acquired. The amount of the
asset that is recorded may not be increased for improvements in
market value or inflation, nor can it be updated to reflect any
depreciation.
Dual aspect concept :The dual aspect concept states that since
every transaction has a dual effect, the accounting records
must reflect the same to show the accurate movement of funds.
For instance, a buyer pays cash in return for a purchased item while
the seller gains cash for the sold item.
Matching concept: Matching principle is especially important in the
concept of accrual accounting. Matching principle states that
business should match related revenues and expenses in the same
period. They do this in order to link the costs of an asset or revenue
to its benefits.
6. Realisation concept : The realization principle is a concept in
accounting that states that revenue should be recognized once it is
earned. This is the point at which a business can reasonably expect that
the customer will pay for the goods or services.
Accrual concept: A financial accounting method in which revenues
and expenses are recorded when a transaction occurs rather then when
money is exchange .
7. Accounting conventions are certain guidelines for complicated and
unclear business transactions. While standardizing the financial
reporting process, these conventions consider comparison, relevance,
full disclosure of transactions, and application in financial statements.
Types of Convention
Consistency:
Conservatism:
Materiality:
Full Disclosure: