Accounting Concepts: A concept is a belief about the desirability of a method or procedure.

Accounting concepts are defined as basic assumptions on the bases of which financial statements of a business entity are prepared. The important accounting concepts are as below:
1. 2. 3. 4. 5. 6. 7. 8. 9.

Business entity concept Money measurement concept Cost concept Going concern concept Dual aspect concept Realization concept Accrual concept Accounting period concept Revenue Match concept

1. Business Entity concept



The business firm is regarded as a separate legal entity apart from its owners, creditors, managers and others. Based on this concept all the transactions of the business are recorded in the books of the business from the viewpoint of the business.

Advantage & Drawbacks of Entity Concept:

Advantage:
The business entity concept is based on the sense that proprietors entrust resources to the management is expected to use these resources to the best advantage of the firm and to account for the resources placed at its disposal. y This concept helps in ascertaining the profit of the business as only the business expenses and revenues are recorded. y It is the very basis of accounting concepts, conventions and principles.
y

Drawbacks
The failure to recognize the business as a separate entity would make it extremely difficult because :  The performance of the business alone  The private transactions would get mixed and introduce bias in the results

Overall Overall Effects of Adopting Business Entity Concept:

Effects: y Only business transactions are recorded and reported. y Personal transactions of the owners are not recorded. y Incomes & profit of the business is the property of the business unless distributed to the owners. y The personal asset of the owners or the shareholders are not considered while recording & reporting the assets of the business.

2. Money


Measurement
Concept

The money measured concept underlines the fact that in accounting every event worth recording or transaction is recorded in terms of money.  A unit of exchange and measurement is necessary to account, for the transactions of the business.  The common denominator chosen in accounting is the monetary unit (money)  System of accounting treats all units of money as the same irrespective of their dimensions.
Cont

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

Treatment for non-monetary transactions under the money measure concept:

y

y y

Events which cannot be expressed in terms of money do not find place in the books of accounts though they may be very important for the business. Non-monetary events are not recorded in the books, though these may have great effect. Accounting this does not give a complete account of the happenings in a business or an accurate picture.

3. Cost concept
The underlying idea of cost concept is:
y

Significance
y

assets acquired are recorded at the price paid to acquire it, that is at cost. this cost is the basis for all subsequent accounting for the asset.

this concept requires asset to be shown at the price it has been acquired, which can be verified from the supporting documents. It helps in calculating depreciation on fixed assets. The effect of cost concept is that if the business entity does not pay anything for an asset, this item will not be shown in the books of

4. Going concern concept

Business transactions are recorded on the assumptions that the business will continue for a longtime.  It is because of this concept that fixed assets are valued on the basis of cost less proper depreciation ignoring fluctuations in the prices of these assets.  If it is certain that a business will continue for a limited period, then the accounting records will be kept on the basis of expected life of the business.


Significance of going concern concept:

facilitates preparation of financial statements. depreciation is charged on the fixed asset. great help to the investors, as, it assures them that the will continue to get income on their investments. A business is judged for its capacity to earn profits in future.

5. Dual Aspect concept

This concept is based on double entry system of bookkeeping. y The recognition of the two aspects to every transaction is known as dual aspect concept. y The total amount debited is equal to the total amount credited.
y

Significance y helps accountant in detecting error.

y

encourages the accountant to post each entry in opposite sides of two affected accounts.

This concept expresses relationship that exists among assets, liabilities and capital, in the form of accounting equation, as follows:

Assets = Capital liabilities OR Capital = Assets Liabilities

6. Realisation Concept
No profit is supposed to accrue only on the acquisition of anything, however certain it may be that it will be sold at a profit. According to this concept revenue is recognized only when a sale is made.
Revenue is said to have been realised when cash has been received or right to receive cash on the sale of goods or services or both has been created. The concept of realisation states that revenue is realized at the time when goods or services are actually delivered.

7. Accrual Concept

8. Accounting period concept

All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. This concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. (may be of one year, six months, three months, one month, etc.)

9. Revenue Match Concept:

This concept is based on accounting period concept. The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period.

Significance  guides how the expenses should be matched with revenue for determining exact profit or loss for a particular period.  is very helpful for the investors/shareholders to know the exact amount of profit or loss of the business.