ACCOUNTING CONCEPT



Accounting Concept defines the assumptions on the basis of which Financial Statements of a business entity are prepared. Certain concepts are received assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process. The word concept means idea or nation, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods. Concepts are those basis assumption and conditions, which form the basis upon which the accountancy has been laid. Unlike physical science, Accounting concepts are only results of broad consensus. These accounting concepts lay the foundation on the basis of which the accounting principals are formulated.

Now we shall study in detail the various concept on which accounting is based. The following are the widely accepted accounting concepts.


1.) Entity Concept:- Entity Concept says that business enterprises is a separate identity apart from its owner. Business transactions are recorded in the business books of accounts and owner’s transactions in this personal back of accounts. The concept of accounting entity for every business or what is to be excluded from the business books. Therefore, whenever business received cash from the proprietor, cash a/c is debited as business received cash and capital/c is credited. So the concept of separate entity is applicable to all forms of business organization.


2.) Money Measurement Concept:- As per this concept, only those transactions, which can be measured in terms of money are recorded. Since money in the medium of exchange and the standard of economic value, this concept requires that these transactions alone that are capable of being measured in terms of money be only to be recorded in the books of accounts. For example, health condition of the chairman of the company, working conditions of the workers, sale policy ect. do not find place in accounting because it is not measured in terms of money.


3.) Cost Concept:- By this concept, the value of assets is to be determined on the basic of historical cost. Transaction are entered in the books of accounts at the amount actually involved. For example a machine purchased for Rs. 80000 and may consider it worth Rs. 100000, But the entry in the books of account will be made with Rs. 80000 or the amount actually paid. The cost concept does not mean that the assets will always be shown at cost. The assets may be recorded at the time of purchase but it may be reduced its value be charging depreciation.

Many assets de not have acquisition cost. Human assets of an enterprises are an example. The cost concept fails to recognize such assets although it is a very important assets of any organization.


4.) Going Concern Concept:- According to this concept the financial statements are normally prepared on the assumption that an enterprises is a going concern and will continue in operation for the foreseeable future. Transaction are therefore recorded in such a manner that the benefits likely to accrue in future from money spent. It is because of this concept that fixed assets are recorded at their original cost and depreciation in a systematic manner without reference to their current realizable value.

5.) Dual aspect Concept:- This concept is the care of double entry book- keeping. Every transaction or event has two aspect. If any event occurs, it is bound to have two effect. For Rs.50000, on the other hand stock will increase by Rs.50000 and other liability will increase by Rs.50000. similarly is X starts a business with a capital of Rs. 50000, while on the other hand the business has to pay Rs. 50000 to the proprietor which is taken as proprietor’s Capital.


6.) Realization Concept: - It closely follows the cost concept any change in value of assets is to be recorded only when the business realize it. i.e. either cash has been received or a legal obligation to pay has been assumed by the customer. No Sale can be said to have taken place and no profit can be said to have arisen. It prevents business firm from inflating their profit by recording sale and income that are likely to accrue, i.e. expected income or gain are not recorded.


7.) Accrual Concept:- Under accrual concept the effect of transaction and other events are recognized on mercantile basic. When they accrue and not as cash or a cash equivalent is received or paid and they are recorded in the accounting record and reported in the financial statements of the periods to which they relate financial statement prepared on the accrual basic inform users not only of past events involving the payment and receipt of cash but also of obligation to pay cash in the future and of resources that represent cash to be received in the future. For Example: - Mr. Raj buy clothing of Rs. 50000,a paying cash Rs. 20000 and sells at Rs. 60000 of which customer paid only Rs. 40000. So his revenue is Rs. 60000, not Rs. 40000 cash received. Exp. Or Cash is Rs. 50000, not Rs. 20000 cash paid. So the accrual concept based profit is Rs. 10000 (Revenue- Exp.)


8.) Accounting Period Concept:- This is also called the concept of definite periodicity concept as per going concept on indefinite life of the entity is assumed for a business entity


it causes inconvenience to measure performance achieved by the entity in the ordinary causes of business. Therefore, a small but workable fraction of time is chosen out of infinite life cycle of the business entity for measure the performance and loading at the financial position 12 months period is normally adopted for this purpose accounting to this concept accounts should be prepared after every period & not t the end of the life of the entity. Usually this period is one calendar year. In India we follow from 1st April of a year to 31st March of the immediately following years. Now a day because of the need of management, final accounts are prepared at shoter intervals of quarter year or in some cases a month such accounts are know a interim account.


9.) Matching Concept:- In this concept, all exp. Matched with the revenue of that period should only be taken into consideration. In the financial statements of the organization. If any revenue is recognized that exp. Related to earn that revenue should also be recognized. This concept as it considers the occurrence of exp. And income and do not concentrate on actual inflow or outflow of cash. This leads to adjustment of certain items like prepaid and outstanding expenses, unearned or accrued income.

It is not necessary that every exp. Identity every income. Some exp. Are directly related to the revenue and some are directly related to sale but rent, salaries etc. are recorded on accrual basis for a particular accounting period. In other words periodicity concept has also been followed while applying matching concept.



10.) Objective Concept:- As per this concept, all accounting must be based on objective evidence. In other words, the transactions recorded should be supported by verifiable documents. Only than auditors can verify information record as true or otherwise. The evidence should not be biased. It is for this reasons that assets are recorded at historical cost and shown thereafter at historical lass depreciation. If the assets are shown on replacement cost basis, the objectivity is lost and it become difficult for auditors to verify such value, however, in resent year replacement cost are used for specific purpose as only they represent relevant costs. For example, to find out intrinsic value of share, we need replacement cost of assets and not the historical cost of the assets.

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