What is Accounting Concepts?
Accounting concepts is the basic rules, assumptions and principles which is considered as the basis of recording of business transactions and preparing the accounts.
Types of Accounting Concepts
There are nine types of accounting concepts which are as follows:
- Business Entity Concept
- Money Measurement Concept
- Dual Aspect Concept
- Going Concern Concept
- Accounting Period Concept
- Cost Concept
- The Matching Concept
- Accrual Concept
- Realization Concept
- Business Entity Concept: Business Entity Concept refers to the concept where it is considered that the owners of the business are separate from the business. All the books of accounts are maintained from the view point of business, not the owners. The owners are treated as the creditors of the company. When the owners injects share capital to the company, this is considered as the business borrows money from the owners which is the liability of the business and the owners will be paid dividends against capital.The business entity concept is applied to make it possible to assess the performance of the business and to assess the performance of the owners.
- Money Measurement Concept: Money Measurement Concept states that a business can be recorded only those transactions which is expressed in terms of money.The fact or transactions which can not be expressed in money terms is not recorded in the books of accounts. The limitation of this concept is, some facts may be very important but can not be recorded because that transactions or facts can not be measured in money terms.
- Dual Aspect Concept: Every financial transaction to be recorded when it has two aspects. This two aspects is one is debit and one credit. The Dual aspects can presented as follows: Assets = Liabilities + Owners Equity , or Owners Equity = Assets – Liabilities. This is also known as “Accounting Equation.” Here, assets are the resources owned by the business, liabilities represents the outside liabilities that may include Creditors, debenture holders, bank against the assets of the business.
- Going Concern Concept: Accounting assumes that a business entity will continue its operation for the foreseeable future. The business will continue for the long time unless there is good evidence to the contrary. It is assumed that there is intention of the management to liquidate its business within a predictable future. Considering this assumption, an accountant while valuing the assets does not consider to sale these assets. However, if the accountant has goods reason to believe that the business,or some part of its is going to be liquidated , or the operation to be ceased (within six month, or year), then the resource of the company to be considered as the current assets. In this respect the guideline is stated in International Accounting Standards (IAS) to be followed.
- Accounting Period Concepts: Accounting Period Concept states that the business should be divided into appropriate segments. The life of business is segregated into different period such as 1 year, 6 months etc. to know the performance of the business.
- Cost Concept: The Cost Concept states that the business to be recorded the assets at their original purchase price and the cost will be the basis for all the subsequent accounting period. The assets shown in the financial statements will not record at present value rather it will be recorded at cost price. The cost price may be changed subsequently by charging depreciation. Depreciation reduces the profit of each period. The prime purpose of depreciation is to allocate the cost of an asset over its useful life and not to adjust with the profit.
- Matching Concept: Matching concept is the concept whereby a company recognize the revenues and expenses in the same accounting period. Company report revenues along with expenses during the period. Matching concepts states that the earnings to be recorded at year wise to avoid misstating of earning. If a company reports revenues for the whole period but expenses not recorded properly, the profit of the company will be overstated.
- Accrual Concept: Accrual Concepts states that the income and expenditure will be recorded in the year in which it is incurred, not in the year in which it is received or paid. Thus, accrued income or expenses must be recognized in the year in which it is incurred. The essence of the accrual concept is that net income arises from the events that changes the owner’s equity in a specified period and that these are not necessarily the same as change in the cash position of the business. Thus it helps in proper measurement of income.
- Realization Concept: According to realization concept revenue is recognized when sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay. This implies that revenue is generally realized when the goods are delivered or services are rendered.
An Accountant should have clear concept on accounting concept that may help to recognize the income and expenses. A clear understanding on accounting concepts may help to an accountant producing a reliable financial report.