Basic Accounting Concepts

Introduction

Knowledge of accounting is very essential in all walks of life but many times we ignore the fact that accounting works on a set of principles that work universally. For a systematic accounting process, there should be a structured, measurable, rationalized approach on which accounting is based. This post is the short explanation of the basic concepts in accounting practice.

 

A.Business Entity Concept /separate entity/ economic entity concept

According to this concept, a business and its owner should be treated separately as far as their financial transactions are concerned. In other words, while recording the financial transactions of a business, we must be very straight and clear that, accountants must take into account of only the events that will affect his/her particular business and not to consider if these transactions are affecting anyone else’s business. For example, you brought an additional power generator by paying 50,000 Rupees and this has a direct benefit to you but it is a drawback for the building owner of the space you rented, here the loss incurred to the owner will nowhere come under your accounts.  This concept will also prevent mixing up of your business with others.

 

B. Money Measurement Concept

Money measurement relates to those transactions of a business, which are recorded and stored in the form of notes, cheques, DDs, but not in the form of liquid cash. In the majority of firms, cash is not accountable under the regular business. Hence, it  is advisable that all the assets must be shown in terms of monetary records. 

 

C. Matching Concept in accountancy

The matching concept is concerned with the timeliness of recordings. In an accounting practice, matching concept means firms must recognize the revenues and their related expenses in the same accounting period ( quarterly or annually). For example, in an account book, the 1st quarter refers to the revenues and expenses calculated and recorded between the 1st of April to  30th of June. The expenses incurred to earn these revenues must also be recorded in the same accounting period. This principle is used under various circumstances like matching the cost of goods and services with revenues or comparing the revenues with expenses and so on. Matching can be revenues and expenses OR cost of goods with sales.

 

D. Concept of Revenue Recognition (Revenue Realization)

It means, the application of the accruals concept on the recognition of revenue (income). Revenues are recognized by the seller when they truly earned as cash but when the ownership has changed. Accountant must make sure that the transaction has been received completely in cash. Based on the revenue recognition principle, it is wrong to take into the account of credit sales. Therefore, the concept of revenue recognition occurs when the revenue for a business transaction is included in the accounting records only when they are realized. 

 

E. Concept of Full Disclosure

Full disclosure serves to improve the transparency among the investors, the public and the members of the organization. The full disclosure concept is an accounting principle that demands the top management to  publish the business-related information either by electronic media or by print media and it is mandatory. Additionally, the information must be true and genuine. Every joint-stock firm in India obeys the SEBI ( security exchange board of India) guidelines while disclosing the information. 

 

F. Going Concern Concept

This means a business is a never-ending affair and it always exists no matter whatever the risk. A going concern in a business doesn't really bother about the threat of liquidation for the foreseeable future for at least the next 12 months. One of the best examples of the application of going concern concept of accounting is the calculation of depreciation on the basis of the expected economic life of fixed assets instead of their current market value. In this case, a company assume that its business will continue for an indefinite period of time and the assets will be used in the business until fully depreciated.

 

G. Accounting Period Concept

Accounting must always be a measurable entity  in a specific time period. Every transaction must have its span of time within which the  financials of the corresponding period  should be assessed and recorded. The most common time slots in practice are quarter, and annual periods. This period defines the average duration over which business transactions are accumulated into financial statements. Accounting Period Concept helps the accountants  to compare the results of all successive time periods. 

 

H. Cost Concept

While recording the true value of an asset or a transaction,it is necessary to record the value at the time of purchase but not its current value. Some of the  costs that must be included in the books of records are ,the cost incurred for acquisition, distribution, packing, transportation, installation, and initial maintenance, etc and these costs are entered as soon as the transaction occurs. Therefore, the cost concept is historical in nature because the desired amount of an asset or good is paid on the date of acquisition itself and it does not change year after year.

 

I. Dual aspect concept

The dual aspect concept states that there must be at least 2 entries for every business transaction. Keeping this in mind, accountants use 2 types of accounting books, they are books of original entry and the books of final entry. Therefore, a dual concept works on the basis of double-entry accounting to provide a sound and reliable financial proof for every transaction. Furthermore, in any type of records used in the accounting process, every debit has a corresponding credit entry, therefore, accounts follow dual aspect concepts.

 

J.revenue recognition concept

Revenue refers to the gross inflow of cash after the sale of goods and services. The revenue recognition principle is a fundamental concept of accrual accounting together with the matching principle. The revenue from any source must be recorded only when it is actually realized.  According to the principle, revenues are recognized only when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), but it is nothing to do with whether the cash is received or not.

 

K. Conservatism concept

The conservatism principle says that recognizing expenses and liabilities must be done as soon as possible. This is even more important in case if there is a degree of uncertainty about the outcome. It is important to note that, one must  recognize revenues and assets only when they are assured of being received. Conservatism is said to be applicable in general, when we should recognize a transaction resulting in the lower amount of profit, or at least the deferral of a profit.

 

L. Materiality Concept

According to this, the books of accounts must focus only on the materialistic aspect and there is no scope for immaterial information. In other words, in an accounting system, there must not be space for baseless  assumptions that lacks accountability and all accounts must have corresponding entries with evidence.

 

 



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