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Concepts of Accounting in detail

Accounting concepts refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. These concepts constitute the very basis of accounting and are developed over the years from experience so they are universally accepted.

These concepts are discussed below :-

  • BUSINESS ENTITY CONCEPT :- As per this concept, the owner and the business should have distinct identities. This will help the accountant identify the business transactions from the personal ones. All forms of business organizations (proprietorship, partnership, company, AOP, etc) must follow this assumption.

For example, any capital introduced by the owner in the business should be treated as liability in the balance sheet.

  • MONEY MEASUREMENT CONCEPT :- As per this concept, only those transactions which can be expressed in terms of money should be recorded in the books of accounts. Non monetary events like death of an employee, honesty of the manager etc should bot form part of the accounting records.
  • DUAL ASPECT CONCEPT :- As per this concept, every business transaction has a dual affect. Thus, for every credit, there must be a corresponding debit. For example, a business buys an asset for Rs 5,000. In this case the fixed assets will increase by Rs 5,000 while at the same time the bank /cash balance will reduce by Rs 5,000.
  • GOING CONCERN CONCEPT :- This concept states that a business firm will continue to carry on its activities for an indefinite period of time and is not going to end its operations any soon. The going concern principle allows a business to defer some of their prepaid expenses to future accounting periods, rather than recognising them all at once.
  • COST CONCEPT :- This accounting concept states that all assets of the firm are entered into the books of account at their purchase price (cost of acquisition + transport + installation etc). The market price of the asset is not taken into consideration.
  • REALISATION CONCEPT :- This concept states that revenue from any business transaction should be included in the accounting records only when it is realised. Unearned/Unrealised revenue should not be taken into account.
  • ACCOUNTING PERIOD CONCEPT :- This concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. Hence, all the transactions are recorded in the books of accounts for a specified period of time .
  • MATCHING CONCEPT :- This concept requires the revenue for a particular period to be matched with its corresponding expenditure so as to show the true profit for the period.
  • FULL DISCLOSURE CONCEPT :- As per this concept, all necessary information should be disclosed by the company in its financial statements which is required by various external users.
  • CONSERVATISM CONCEPT :- This concept states that a business should record the expenses and losses as soon as possible but only recognize revenues when they are actually earned.

Thus, every business is required to follow these accounting concepts in order to maintain uniformity and consistency in maintaining the books.

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