Accounting concepts
Accounting concepts are like the building blocks that support the structure of
accounting. They are basic assumptions and conditions on which the entire
accounting system is built.
1. Business Entity Concept: This concept says that the business and its owners
are separate. It means business transactions are recorded separately from the
personal transactions of the owners.
Example: When the owner invests money in the business, it's considered a
liability of the business to the owner because the business owes the owner that
money. Likewise, when the owner withdraws cash or goods for personal use, it's
not treated as a business expense because it's the owner's personal transaction,
separate from the business activities.
2. Going Concern Concept: This concept assumes that a business will continue to
operate for indefinite period. It means that financial statements are prepared
with the idea that the business will continue to exist and function normally.
3. Money Measurement Concept: This concept says that only transactions that
can be expressed in monetary terms are recorded in accounting. Non-monetary
events like employee satisfaction or customer loyalty are not included.
Example: Imagine a company buys a piece of land for Rs.100,000. So, the
purchase of the land is recorded as Rs.100,000, reflecting its cost to the
company. Non-monetary aspects like the beauty of the land or its strategic
location are not considered in the accounting records because they cannot be
measured in Rupees.
4. Cost Concept: This concept states that assets are recorded at their original cost
when acquired by the business. It means assets are initially valued at what the
business paid for them, regardless of any increase or decrease in their value
over time.
5. Accounting period concept: The Accounting Period Concept is like breaking
down the financial activities of a business into smaller time periods, typically a
year. This helps in organizing and reporting financial information regularly. For
example, if a company makes sales or buys goods, it records these transactions
within a specific period, like a month or a year. By doing this, it makes it easier
to track performance, assess profitability, and prepare financial statements, like
income statements and balance sheets, for investors and stakeholders.
6. Dual aspect concept: The Dual Aspect Concept in accounting assumes that
every transaction has two sides, or aspects. This means that for every action (like
buying goods or receiving cash), there's an equal and opposite reaction (like
paying money or giving goods). For example, if a business sells a product and
receives cash, it records both the increase in cash and the decrease in
inventory. This concept ensures that the accounting equation (Assets =
Liabilities + Equity) stays balanced, providing a clear picture of the business's
financial health.
7. Matching Concept: The Matching Concept in accounting is like pairing up
expenses with the revenues they helped generate. It means that expenses are
recorded in the same period as the related revenues. For example, if a company
sells a product in January, the costs incurred to make that product, like
materials and labor, are also recorded in January. This helps in accurately
determining the profit earned/loss occurred during a specific period and
provides a clearer picture of the company's financial performance over time.
8. Realisation Concept: The Realisation Concept in accounting means recognizing
revenue only when it's earned and can be measured reliably. For instance, if a
company sells a product, revenue is recorded at the time of sale, even if the
payment is received later. This ensures that the company reports its income
accurately, matching it with the activities that generated it, rather than just
when cash is received.
9. Accrual Concept: The Accrual Concept in accounting is like keeping track of
money as it's earned or spent, not just when it's received or paid. For example, if
a company provides services in January but doesn't get paid until February, it
still records the revenue in January. Similarly, if it receives an electricity bill in
December but pays it in January, the expense is recorded in December. This
concept helps show a more accurate picture of a company's financial health by
matching revenues with the expenses they helped generate, even if cash hasn't
changed hands yet.
