Accounting concept
Accounting concept refers to the basic assumptions and rules and
principles which work as the basis of recording of business transactions
and preparing accounts.
Following are the various accounting concepts that have been discussed in the following sections
This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate.Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. This concept is the very basis of accounting.
2.MONEY MEASUREMENT CONCEPT
This concept assumes that all business transactions must be in terms of money, that is in the currency of a country. In our country such transactions are in terms of rupees.
3 GOING CONCERN CONCEPT
This concept states that a business firm will continue to carry on its activitiesfor an indefinite period of time. Simply stated, it means that every businessentity has continuity of life. Thus, it will not be dissolved in the near future.This is an important assumption of accounting, as it provides a basis for
showing the value of assets in the balance sheet
.4 ACCOUNTING PERIOD CONCEPT
All the transactions are recorded in the books of accounts on the assumptionthat profits on these transactions are to be ascertained for a specified period.This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regularintervals. This is necessary for different purposes like, calculation of profit,ascertaining financing position, tax computation etc.
5 ACCOUNTING COST CONCEPT
Accounting cost concept states that all assets are recorded in the books ofaccounts 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.The cost concept is also known as historical cost concept. The effect of cost concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price.
.6 DUAL ASPECT CONCEPT
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts.This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. For example, goods purchased for cash has two aspects which are
(i) Giving of cash
(ii) Receiving of goods. These two aspects are to be recorded.
Thus, the duality concept is commonly expressed in terms of fundamental accounting equation :
Assets = Liabilities + Capital
7.REALISATION CONCEPT
This concept states that revenue from any business transaction should beincluded in the accounting records only when it is realised. The term realisation means creation of legal right to receive money
.8 ACCRUAL CONCEPT
The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised when they become receivable.Though cash is received or not received and the expenses are recognised when they become payable though cash is paid or not paid. Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash
and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses.
9 MATCHING CONCEPT
The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept
Accounting concept refers to the basic assumptions and rules and
principles which work as the basis of recording of business transactions
and preparing accounts.
Following are the various accounting concepts that have been discussed in the following sections
- Business entity concept
- Money measurement concept
- Going concern concept
- Accounting period concept
- Accounting cost concept
- Duality aspect concept
- Realisation concept
- Accrual concept
- Matching concept
This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate.Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. This concept is the very basis of accounting.
2.MONEY MEASUREMENT CONCEPT
This concept assumes that all business transactions must be in terms of money, that is in the currency of a country. In our country such transactions are in terms of rupees.
3 GOING CONCERN CONCEPT
This concept states that a business firm will continue to carry on its activitiesfor an indefinite period of time. Simply stated, it means that every businessentity has continuity of life. Thus, it will not be dissolved in the near future.This is an important assumption of accounting, as it provides a basis for
showing the value of assets in the balance sheet
.4 ACCOUNTING PERIOD CONCEPT
All the transactions are recorded in the books of accounts on the assumptionthat profits on these transactions are to be ascertained for a specified period.This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regularintervals. This is necessary for different purposes like, calculation of profit,ascertaining financing position, tax computation etc.
5 ACCOUNTING COST CONCEPT
Accounting cost concept states that all assets are recorded in the books ofaccounts 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.The cost concept is also known as historical cost concept. The effect of cost concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price.
.6 DUAL ASPECT CONCEPT
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts.This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. For example, goods purchased for cash has two aspects which are
(i) Giving of cash
(ii) Receiving of goods. These two aspects are to be recorded.
Thus, the duality concept is commonly expressed in terms of fundamental accounting equation :
Assets = Liabilities + Capital
7.REALISATION CONCEPT
This concept states that revenue from any business transaction should beincluded in the accounting records only when it is realised. The term realisation means creation of legal right to receive money
.8 ACCRUAL CONCEPT
The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised when they become receivable.Though cash is received or not received and the expenses are recognised when they become payable though cash is paid or not paid. Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash
and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses.
9 MATCHING CONCEPT
The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept
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