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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.
Sir Qubair Saleem Chartered Certified Accountant. qubair accamail.com
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