-: Accounting concepts: -
1. The business entity concept: According to this, the business and owner are separate entities.
Business transactions are recorded in the books of accounts from the company’s point of view, and not
the owners. The owners are considered separate from their business’s point of view and are regarded as
creditors to the extent of their capital.
2. Money measurement concept: The money measurement concept says that a business should
record only those transactions which can be expressed in monetary terms. It means that transactions
like purchase and sale of goods, rent payment, expenses payment, earning of revenue, etc., will be
recorded in the books of accounts of the firm.
3. Going concern concept: The going concern concept assumes that an organization would continue
its business operations indefinitely. It means that it is assumed that the business will run for a long period
of time, and there is no intention to close the business or cut down its operations significantly.
4. Cost concept: According to this concept, an asset is recorded in the books of account at the
price paid to acquire it, and the cost is the basis for all following accounting of the asset.
5. The dual concept: According to the dual aspect concept, every business transaction entered into by the
organisation has two aspects, a debit and an equal creditor amount. For every debit, there will be an equal
amount of credit. Assets = Liabilities + Capital
6. The accounting period concept: According to the accounting period concept, the life of an
enterprise can be broken into smaller periods, usually termed accounting periods, so that its
performance is measured at regular intervals. According to the Companies Act, 2013 and the
Income Tax Act, an organization has to prepare its income statements annually. However, in some
cases, like the retirement of a partner between the accounting period, etc., the firm can prepare
interim financial statements.
7. Matching concept: The matching concept states that an organization should recognize its
expenses in the same financial year if the expense is related to the revenue of that year. In simple
words, if a firm is earning revenue in an accounting period, even though it incurs the expenses
related to that revenue in the next accounting year, the expense will be realized in the same
accounting year when the revenue has been realized by the firm.
8. Realization concept: The revenue recognition concept, also known as the realization concept, as
the name suggests, defines that an organization should record its revenue from business only when
it is realised, not when the firm has received the cash.
9. Objective Evidence: The objectivity concept of accounting states that an organization should
record transactions in an objective manner. It means that the recording should be free from any kind
of biasness by accountants and other people. Objectivity in the recording of transactions is possible
when the transactions of the firm are supported by verifiable vouchers or documents.
10. Accrual concept: The accrual concept based on recognition of both cash and credit
transaction. An accrual is an accounting term used to describe the process of recording income or
expenses when they occur, rather than when payment is made or received.
➢ Consistency: prescribes the use of the same accounting principles from one period
of an accounting cycle to the next, so that the same standards are applied to
calculate profit and loss.
➢ Full disclosure: Convention of full disclosure states that there should be complete
reporting on the financial statements of all important information relating to affairs
of the business. All the material facts are to be disclosed.
➢ Prudence concept or conservatism concept: This convention states that we should
not anticipate a profit before its realisable but provide for all possible losses which
might occur in the course of business.
➢ Materiality concept: The materiality concept relates to the relative information of an
item or an event. An item is considered material when such knowledge of that could
influence the decision of an investor.
