Accounting Concepts Notes

In order to maintain uniformity and consistency in preparing and maintaining books of accounts, there are some rules or principles. These rules/principles are classified as concepts and conventions. These are foundations of preparing and maintaining accounting.

Following are the various accounting principles

1. BUSINESS ENTITY CONCEPT

This concept assumes that, for accounting purposes, the business and its owners are separate. Thus, the business and personal transactions of its owner are separate

Example: If the owner went out for a dinner in a 5 star hotel, and made a bill of $2000 , then according to business entity concept he can not charge this personal expense as an business expenditure in the income statement because the owner and the business are separate.

2. MONEY MEASUREMENT CONCEPT

This concept assumes that only those transactions will be recorded in accounting which can be measured in money (the currency of a country). In our country such transactions are in terms of rupees.

Example: Motivation of employees, intelligence, grievances cannot be seen in any accounting books because transactions which can be expressed in money only be recorded.

3. GOING CONCERN CONCEPT

This concept states that a business firm will continue its operations in the foreseeable future. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future.

Example: CNG stations operating in Pakistan if stopped by the Pakistani court from carrying out operations. The CNG stations are not a going concern in Pakistan, because they have to shut down.

4. ACCOUNTING PERIOD CONCEPT

All the transactions are recorded on the assumption that profit/loss on these transactions are to be ascertained for a specified period. Example: a calendar year. This is known as accounting period concept.

5. HISTORICAL COST CONCEPT

Historical cost concept states that all assets are recorded in the books of accounts at their original purchase price, which includes cost of acquisition, transportation and installation and not at its market price.

Example: 100 machines were purchased one month back for $1000 per machine. The price today is $1100 per unit. The machinery shall appear on balance sheet at $1,000,000 and not at $1,100,000.

6. DUAL ASPECT CONCEPT

Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides

7. REVENUE RECOGNTION/ REALISATION CONCEPT

This concept states that revenue from any business transaction should be included in the accounting records only when it is realised. The term realisation means creation of legal right to receive money. Selling goods is realisation, receiving order is not.

8. CONSISTENCY CONCEPT

This Concept says that the Accounting practices should not change or must remain unchanged over a period of several years.

9. ACCRUALS CONCEPT

Business transactions are recorded when they occur and not when the related payments are received or made. This concept is called accrual basis of accounting and it is fundamental to the usefulness of financial accounting information.

Example: An airline sells its tickets days or even weeks before the flight is made, but it does not record the payments as revenue because the flight, the event on which the revenue is based has not occurred yet.

10. MATCHING CONCEPT

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

Example: Rent for the year Jan to Dec is $9000, the accounting period is from July to June, according to the Matching principle Rent Expense of $4500 ($9000/2) should be charged against the revenues in the income statement

11. MATERIALITY CONCEPT

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