Monthly Archives: July 2016

Concepts of Accounting

Concepts of Accounting:

Accounting is based on two basic concepts

  • Business entity
  • Money measurement

Although there are also other concept of accounting but business entity and money measurement concepts are the basic concepts. Each of the concepts of accounting is discussed below briefly:

Money measurement concept:

According to money measurement idea, only that bonds in our accounting data which are measurable in financial terms, are requested.

Business Entity concept:

Business entity concept says that the firm and the owner of firm are two different entities. In simple words we can say that I and my company are separate.

Going concern concept:

Accounting is based on the inference that trade unit is a going concern. We keep all the economic data of a firm by keeping this point of view that a firm or trade is a going concern; not a gone concern. It means we always consider a trade or business in continuity form. In case if not take it as a going project we will be unable to obtain loans form the banker, we will also not get supplies or services from the supplier. In this case work of  employees will also be lessened, and the process of data recording will altogether.

Some cases have exception to this concept. These cases are:

  • One of the units is being stated sick.
  • When there is conversion and the converter is being appointed for same.
  • When there is extreme economic crisis and the business is going to end up.

Cost concept:

Cost concept is one of the important concept of accounting which depends on the going concern concept. As we always order the value of the things or assets on the basis of their cost instead of  their possible value or wholesale value of the assets based on inference that a firm unit is a going concern. No confusion, we decrease the value of assets giving deflation to assets, but we overlook the value of assets in the market.

The cost concept block all kind of manipulation by taking into account that value of assets in the market. Its bad effect is that this concept neglects the effect of expansion in the market. But still,  this concept generally accepted.

Dual aspect concept:

This concept says that there should be double entry for completion of any economic transaction, means debit and credit should be equal . Therefore,  there is dual aspect in all financial transaction:

  • You get benefit
  • You give benefit

Accounting Period Concept

For calculation of the loss or profit and to determine economic status of any firm balance sheets and profit, loss accounts for that firm are regularly prepared, most commonly at the end of year. This one year cycle is called as the accounting period for that company. In the view of past performances and to decrease the damage due to seasonal changes , we get guide from the accounting period. Accounting period tells us the exact status of the firm at specific intervals.

Matching concept:

This concept of accounting is based on accounting period concept. According to this concept, the expenses of a firm for specific accounting duration are matched with the credit of similar accounting duration to determine exact profit or loss for the similar duration of accounting. This practice is accepted worldwide.

Accrual concept:

As already said in the matching concept before, the credit for the specific accounting period is considered and expenses related to the accounting duration is also considered. On the basis of this concept if our items are sold or we provided some service, then that is our source of revenue irrespective of the fact that we received cash or not. Cash basis of accounting is used by most of the professionals which means that cash received and expenses during that particular accounting duration is the basis of their accounting.

Objective evidence concept:

According to this concept there should be an evidence of objective behind every economic entry. For example there should be purchase bill for any purchase, sale with their bills, cash memos in case of cash expenditure and cash receipts should be presented for payment to creditors. In case of stock there should be personal verification and its value should also be matched with its purchase bills. In case these are not present, there will be no accuracy in accounting, manipulation chances will be increased to great extent and people will not trust on such economic statements.