ACCOUNTING CONCEPTS
Accounting is a business language used to communicate the
financial information of the business to the people concerned. This make it
important for accounting to be based on certain concepts. These concepts imply
the necessary assumptions or conditions upon which accounting is based
BUSINESS ENTITY CONCEPT
According to this concept, a business is a separate entity
from its owner. Business transactions are recorded from the point of view of
the business entity and not the owner. Legally business and owner are treated
as same but for the purpose of accounting treatment both are considered
separate. Owner invested capital. In business and can claim for it so he is
treated as creditor of business and business is treated as debtor. That’s why
capital is always treated as liability of business.
MONEY MEASUREMENT ASSUMPTION
In accounting everything in recorded in terms of money.
Events or transactions which cannot be expressed in terms of money are not
recorded in the books of accounts, even if they are very important or useful
for the business. Purchase and sale of goods, payments of expenses and receipt
of income and receipt of income are monetary transactions which find place in
accounting.
GOING CONCERN ASSUMPTION
The following points show the significance of going concern
assumptions when business is started it is assumed that business will exist for
indefinite period. Business is judge for its capacity to earn profits in future
on based of this assumption. Assets and liabilities are classified into short
term and long term nature on the basis. Income and expenses are classified in
revenue nature and capital nature on this basis.
PERIODICITY ASSUMPTION
Under the going concern assumption it is assumed that a
business entity has a reasonable expectation of continuing its business or an
indefinitely period of time. Actual profit of business can be calculate at the
time of the closure or liquidation of business by taking the difference between
the capital introduced and capital remaining. But a businessman does not have
patients to wait till liquidation to know his profit and even there is no use
of such calculation of profit because after closure of business no steps could
be taken for rectification in case of loss. According to this assumption, so
the life of business is broken into small repetitive period to find profits or
loss. Generally, this interval is taken as 12 months. Thus at the interval of
12 months, the businessmen measures his income and studies the financial
position of his business. If the gap or interval is very big then it would not
help in taking timely corrective steps.
ACCRUAL CONCEPT
The meaning
of accrual is something that become due yet to be paid or received at the end
of the accounting period in terms of money. According to this concept, revenue
is realized at the time of sale of goods or services irrespective of when cash
is received and expenses are recognized at the time of services and utilized in
the generation of revenue irrespective of the payment made. For example: order
for goods is received on 1 April, 2015 for delivery making on 15 April and
payment received on 30 April. Income is recognized on 15 April, 2015.
MATCHING
CONCEPT
According to
matching concept, we compare the expenses with the revenues for an accounting
period in order to determine the net profit or loss of a business of the
period. If revenue exceed expense, it is called profit or income and in case
expense exceeds revenue, it become loss. According to this concept expenses and
income of one accounting period are adjusted in the expenses and income of the
same accounting period. If any expense or income of previous year or next year
are there they should be reduced from related account because a per accrual concept
they were already in the belonging year.
DUAL ASPECT
CONCEPT
This concept
indicates that each transaction has two aspects and is recording in two
difference accounts. Example, if a business house purchase machine on cash
basis, the machine account and the cash account will be affected.
The
double-entry system of accounting is based on this concept. The basis
presumption of this system is that every business transaction has to aspects. Under
this system, both the aspects of a transaction are recognize and recording.
ACCOUNTING
PERIOD CONCEPT
The time
period for which final accounts business are maintained is called the
accounting period. The life of business is indefinitely long period which is
divided into shorter periods for summarizing accounting information and for
effective control. Accounts for a business are prepared for a specific period,
generally a 12-month period. In India, the accounting period is generally, taken for april 1 to 31 march.
OBJECTIVE
VERIFIABLE CONCEPT
According to
this concept every transaction which is recording in book of accounts must have
proof in written or printed. Any transaction recorded without any proof is
considered as fraud.
ACCOUNTING CONVENTION
Defining accounting conventions
Conventions are
the customs and traditions that act as a guideline for the preparation of the
final account. Following these conventions results in the presentation of clear
and meaningful final accounts.
The conventions
followed to prepare accounting statements are:
·
Convention
of consistency
·
Convention
of conservatism
·
Materiality
convention
CONVENTION OF CONSISTENCY
According to
the convention of consistency the accounting practices and methods should not
be changed from one accounting period to another. For example, there are 2 methods
to charge depreciation, written down value method and straight line method. The
methods once chosen should be used consistently year after year. Consistency in
accounting practices and methods makes the records of the company for
difference years comparable.
CONVENTION CONSERVATISM
According to
this convention the accounting records should present a realistic picture of
the state of affairs of the business. All the prospective loss should be
accounted for and all prospective gains should be ignored.
MATERIALITY CONVENTION
According to
this convention, all relatively relevant items, the knowledge of which might
influence the decision of the user of the financial statements, should be disclosed
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Reviewed by Sonu Singh
on
August 12, 2018
Rating:
Reviewed by Sonu Singh
on
August 12, 2018
Rating:
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