BASIC CONCEPTS OF ACCOUNTING

BASIC CONCEPTS OF ACCOUNTING

1. Business entity concept

This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense. Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business.

2. Money Measurement Concept

This concept assumes that all business transactions must be in terms of money, that is in the currency of a country. In our country such transactions are in terms of rupees.

3. Going Concern Concept

When the accounting of a business is being managed, it should be assumed by the accountant that the business is viable and will still operational in the foreseeable future. If the accountant has any reason to believe that the business will not remain viable in the foreseeable future, he or she must state the reasons for coming to that conclusion in the financial reports of the business. If the accountant has an opinion that the company will not remain in business and there are no sufficient evidence to proof the opposite, the accountant may simply include a disclaimer in the financial reports stating that he or she believes, but cannot show evidence to prove that the business will not remain viable.

4. 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. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals.

5. Accounting Cost Concept

Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them.