Accounting: -Accounting is a language of business by which financial statements communicate to the various stakeholders for decision making purpose.
Accounting Concepts: – Accounting concepts are the basic assumptions and conditions which work as the basis of recording of business transactions and preparing accounts.
The following are the widely accepted accounting concepts: –
Entity Concept: -According to this concept, business enterprise is a separate entity from its owners. All the business transactions are recorded in the books of business from the point of view of business.
In addition to this, entity concepts help to identify how much amount of money is due to the owner in form of his capital and share of profits.
For example: – Mr. Ram started business investing ₹ 5,00,000, out of this he purchased machinery for ₹ 3,00,000 and maintained the balance in the hand. The financial position will be as under:
| Capital | ₹ 5,00,000 |
| Machinery | ₹ 3,00,000 |
| Cash | ₹ 2,00,000 |
The business owes to Mr. Ram ₹ 5,00,000 but if Mr. Ram spends ₹ 5,000 to meet his personal expenses from the business fund then it should not be taken as business expenses and would be charged to his capital account [investment would be reduced by ₹ 5,000].
Here, the entity concept will revise the financial position. This would be as under:-
| Liability | ₹ | ₹ |
| Capital Less : Drawings | 5,00,000 5000 | 4,95,000 |
| Machinery | 3,00,000 | |
| Cash | 1,95,000 |
Going Concern Concept: –
It means the business will have an indefinite life [ it will continue for a long time]. The valuation of assets of a business is based on this assumption.
It is because of this concept that fixed assets are valued on the basis of cost less proper depreciation by considering expected useful life ignoring fluctuations in the prices of these assets.
Money Measurement Concept: –
According to money measurement, transactions and events which can be expressed in terms of money are recorded in the books of account. Consequently, events which cannot be expressed in terms of money do not find place in the books of account.
For example: – employees of the organization are the assets of the organizations but they cannot measure in monetary terms.
Accounting Period Concept: –
As per this concept, accounts should be prepared after every period [usually period is calendar year]. We generally follow 1st April to 31st March.
Moreover, period of one year takes up for the performance measurement and appraisal of financial position.
Cost Concept: –
Under this concept, assets are to be recorded at historical cost or at acquisition cost [purchase price + all expenses incurred to put the asset to use].
for example, if an enterprise buys a machine for ₹ 2,00,000, the asset [machine] would be recorded in the books of account at ₹ 2,00,000 even if its market value at that time happens to be ₹ 2,50,000.
The cost concept does not mean that the assets will always be shown at cost. The fixed asset will be recorded at cost at the time of its purchase but it may systematically be reduced in its value by charging depreciation.
Dual Aspect Concept: –
it means every transaction has two aspects. For every debit there is a corresponding and equal credit. This concept is based on double entry system.
Matching Concept: –
According to this concept, all expenses matched with revenue of that relevant period should only be taken into consideration. This concept states that if any revenue recognizes then expenses related to earn that revenue should also be recognized.
Further, this concept is based on accrual concept as it considers the occurrence of expenses and income. Accounting period concept or periodicity concept has also been followed while applying matching concept.
As per this concept, various adjustments should be made for outstanding expenses, accrued incomes, unexpired expenses and unearned incomes etc.
Realisation Concept: –
According to this concept, normally, revenue is recognized when it is realized i.e., when the ownership of goods passes to the buyer and the buyer becomes legally liable to pay.
It covers all the probable losses but do not consider probable gain until it is realized.
Accrual Concept: –
Under this concept, all the transactions and events are recognized on the basis of their occurrence [i.e., mercantile basis] not on the basis of cash received or paid.
As per Accrual Concept:-
Profit = Revenue–Expenses
Accounting Conventions: –
- Consistency: – This implies that same accounting policies should be followed from one period to another. A change in accounting policy is made only in exceptional circumstances. For example, methods of depreciation, methods of valuation of inventories.
- Note:- As per consistency, enterprise should follow consistently same method of depreciation and valuation of inventories which is chosen by the enterprise.
- Materiality: – According to this convention, all the material information should disclosed in the books of account. All the items have significant economic effect on business enterprise should be disclosed and ignored the insignificant items and should not be disclosed.
- Conservatism :- Convention of conservatism is the policy of “playing safe“. As per this, accountant should not anticipate any future income but should take all possible losses while recording business transaction in the books of account.
Fundamental Accounting Assumptions: –
There are three fundamental accounting assumptions: –
- Going Concern
- Consistency
- Accrual.