What are accounting concepts
1. Entity Concept:
For accounting purpose, the "business" is treated as a separate entity from the proprietor(s). One can sell goods to himself, but all the transactions are recorded in the book of the business. This concept helps in keeping private affairs of the proprietor away from the business affairs. E.g. If a proprietor invests $ 1,00,000/- in the business, it is deemed that the proprietor has given $ 1,00,000/- to the "business" and it is shown as a "liability" in the books of the business. Similarly, if the proprietor withdraws $ 10,000/- from the business, it is charged to them.
2. Dual Aspect Concept:
As per this concept, every business transaction has a dual effect. For example, if Ram starts a business with cash $ 1,00,000/- there are two aspects of the transaction: "Asset Account" and "Capital Account". The business gets asset (cash) of $ 1,00,000/- and on the other hand, the business owes $ 1,00,000/- to Ram.
3. Going Business Concept (Continuity of Activity):
It is assumed that the business concern will continue for a fairly long time, unless and until has entered into a state of liquidation. It is as per this assumption, that the accountant does not take into account the forced sale values of assets while valuing them.
4. Money measurement concept:
As per this concept, in accounting everything is recorded in terms of money. Events or transactions which cannot be expressed in terms of money is not recorded in the books of accounts, even if they are very important or useful for the business. Purchase and sale of goods, payment of expenses and receipt of income are monetary transactions which are recorded in the accounting books however events like the ***** of an executive, the resignation of a manager is such events which cannot be expressed in money.
5. Cost Concept (Objectivity Concept):
This concept does not recognize the realizable value, the replacement value or the real worth of an asset. Thus, as per the cost concept
a) an asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and
b) this cost is the basis for all subsequent accounting for the asset.
For example, if a machine is purchased for $ 10,000/- it is recorded in the books at $ 10,000/- and even if its market value at the time of the preparation of the final account is $ 20,000/- or $ 60,000/- the same will not considered.
6. Cost-Attach Concept:
This concept is also known as "cost-merge" concept. When a finished good is produced from the raw material there are certain process and costs which are involved like labour cost, power and other overhead expenses. These costs have a capacity to "merge" or "attach"
when they are brought together.
7. Accounting Period Concept:
An accounting period is the interval of time at the end of which the income statement and financial position statement (balance sheet) are prepared to know the results and resources of the business.
8. Accrual Concept:
The accrual system is a method whereby revenue and expenses are identified with specific periods of time like a month, half year or a year. It implies the recording of revenues and expenses of a particular accounting period, whether they are received/paid in cash or not.
9. Period Matching of Cost and Revenue Concept:
This concept is based on the period concept. Making a profit is the most important objective that keeps proprietor engaged in business activities. That is why most of the accountant's time is spent on evolving techniques for measuring the profit/profitability of the concern. To ascertain the profit made during a period, it is necessary to match "revenues" of the period with the "expenses" of that period. Income (profit) earned by the business during a period is compared with the expenditure incurred to earn the revenue.
10. Realization Concept:
According to this concept profit, should be accounted for only when it is actually realized. Revenue is recognized only when a sale is affected or the services are rendered. However, in order to recognize revenue, receipt of cash us not essential. Even credit sale results in realization as it creates a definite asset called "Account Receivable". However, there is a certain exception to the concept like in case of contract accounts, hire purchase etc. Similarly incomes like commission interest rent etc. are shown in Profit and Loss A/c on accrual basis though they may not be realized in cash on the date of preparing accounts.
11. Verifiable Objective Evidence Concept:
According to this concept, all accounting transactions should be evidenced and supported by objective documents. These documents include invoices, contract, correspondence, vouchers, bills, passbooks, cheque etc.
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