ACCOUNTING CONCEPTS

Topics: Generally Accepted Accounting Principles, Business, Depreciation Pages: 6 (1240 words) Published: November 15, 2014
ACCOUNTING CONCEPTS

What are the Account Concepts?

In order to maintain uniformity and consistency in preparing and maintaining books of accounts, Certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. These are foundations of preparing and maintaining accounting records.

“Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts.”

Business Entity Concept
Money Measurement Concept
Going Concept
Accrual Concept
Accounting Cost Concept
Matching Concept
Accounting Period Concept

Business Entity 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.

For example, when the owner invests money in the business, it is recorded as liability of the Business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense.

Example

Suppose Mr. A started business investing Rs100000. He purchased goods for Rs40000, Furniture for Rs20000 and plant and machinery of Rs30000. Rs10000 remains in hand. These are the assets of the business and not of the owner. According to the business entity Concept Rs100000 will be treated by business as capital i.e. a liability of business towards the owner of the business.

The following points highlight the significance of business entity concept:

This concept helps in ascertaining the profit of the business as only the Business expenses and revenues are recorded and all the private and Personal expenses are ignored.

These concept restraints accountants from recording of owner’s private/personal transactions.

It also facilitates the recording and reporting of business transactions from the business point of view

It is the very basis of accounting concepts, conventions and principles.

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.

Example

Sale of goods worth Rs.200000, purchase of raw materials Rs.100000, Rent Paid Rs.10000 etc. are expressed in terms of money, and so they are recorded in the books of accounts. But the transactions which cannot be expressed in monetary terms are not recorded in the books of Accounts. For example, sincerity, loyalty, honesty of employees are not recorded in books of accounts because these cannot be measured in terms of money although they do affect the profits and losses of the business concern.

The following points highlight the significance of money measurement concept:

This concept guides accountants what to record and what not to record.

It helps in recording business transactions uniformly.

If all the business transactions are expressed in monetary terms, it will be easy to understand the accounts prepared by the business enterprise.

It facilitates comparison of business performance of two different periods of the same firm or of the two different firms for the same period.

Going Concept

This concept states that a business firm will continue to carry on its activities for an indefinite period of time.

Example

A company purchases a plant and machinery of Rs.100000 and its life span is 10 years. According to this concept every year some amount will be shown as expenses and the balance amount as an asset. Thus, if an amount is spent on an item which will be used in business for many years, it will not be proper to charge the amount from the revenues of the year in which the Item is acquired. Only a part of the value is shown as expense in the year of purchase and the remaining balance is shown as an...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Accounting Concept Research Paper
  • Generally Accepted Accounting Principles Essay
  • Accounting Concepts Essay
  • Essay on Account: Eleven Key Accounting Concepts Entity
  • Essay on The Accruals And Going Concern Concepts
  • Accounting Concepts Essay
  • Essay on accounting concept
  • Application of Accounting Concepts Matching Prudence Accrual Essay

Become a StudyMode Member

Sign Up - It's Free