Accounting Concepts

Submitted By CHAITHRA.L

Accounting Concepts
v Business entity concept v Dual aspect concept v Matching concept v Objective evidence concept v Money measurement concept v Going concern concept v Cost concept v Accrual concept v Accounting period concept v Realization concept

1.Business Entity Concept

vThe business and its owner(s) are two separate existence entity

vAny private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business

Examples

vInsurance premiums for the owners house should be excluded from the expense of the business

vThe owners property should not be included in the account of the business vAny payments for the owners personal expenses by the business will be treated as drawings and reduce the owners capital contribution in the business

2. DUAL ASPECT CONCEPT

Every transaction recorded in books affects at least two accounts. If one is debited then the other one is credited with same amount. This system of recording is known as DOUBLE ENTRY SYSTEM. ASSETS = LIABILITIES + CAPITAL

3. MATCHING CONCEPT
All the revenue of a particular period will be matched with the cost of that period for determining the net profits of that period. Accordingly, for matching costs with revenue, first revenue should be recognized & then costs incurred for generating that revenue should be recognized.

Following points must be considered while matching costs with revenue-: 1. Outstanding expenses though not paid in cash are shown in the P&L a/c. 2. Prepaid expenses are not shown in the P&L a/c. 3. Closing stock should be carried over to the next period as opening stock. 4. Income receivable should be added in the revenue & income received in advance should be deducted from revenue.

4. OBJECTIVE EVIDENCE CONCEPT

Accounting transactions should be recorded in an objective manner, free from the personal bias of either management or the accountant who prepares the accounts. It is possible only when each transaction is supported by verifiable documents & vouchers such as cash memos, invoices.

5. Money Measurement Concept

v An Accounting record is made only of information which that can be expressed in monetary terms.

vAll transactions of the business are recorded in terms of money

v Market conditions, technological changes and the efficiency of management would not be disclosed in the accounts

6.Going Concern Concept

v vThe business will continue in operational existence for the foreseeable future v vFinancial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise

Examples
vPossible losses form the closure of business will not be anticipated in the accounts

vPrepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenues of future periods

v
vFixed assets are recorded at historical cost

7. COST CONCEPT
vAssets are recorded at their original price. vThis cost serves the basis for further accounting treatment of the asset. vAcquisition cost relates to the past i.e. it is known as historical cost.
vAssets should be shown on the balance sheet at the cost of purchase instead of current value

ExamplevThe cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset for its intended use. v vIt included the invoice price of the assets, freight charges, insurance or installation costs

8.ACCRUAL CONCEPT
In this concept revenue is recorded when sales are made or services are rendered & it is immaterial whether cash is received or not. Same with the expenses i.e. they are recorded in the accounting period in which they assist in earning the revenues whether the cash is paid for them or not.

9. ACCOUNTING PERIOD CONCEPT

Entire life of the firm is divided into time intervals for ascertaining the profits/losses are known as accounting periods. Accounting period is of two typesfinancial year(1st Apr to 31st March) & calendar year(1st Jan to 31st Dec).

10. REVENUE RECOGNITION/REALISATION CONCEPT Revenue means the addition to the capital as a result of business operations. Revenue is realized on three basis-: 1.Basis of cash 2.Basis of sale 3.Basis of production

 For

taxation purposes financial year is adopted as prescribed by the Govt. Companies having their shares listed on stock exchange publishes their quarterly results.

To conclude:
Accounting concepts will help process the information effectively at low cost. It helps to obtain reports quickly. It helps in proper planning and decision making.

Thank You Open For quires