Basic Accounting Concepts

Accounting has evolved over a period of several centuries and certain concepts were evolved during the process of evolution of accounting. These are fundamental ideas or basic assumptions in recording transactions. Accounting concepts are studied under two heads.

 

1. Accounting Concepts at Recording Stage: The following concepts are to be observed at the time of recording stage of transactions in the books of accounts.

1. Business Entity Concept: This concept treats business enterprise as different from the owner. Business transactions are recorded in the business books of accounts and owner’s transactions are recorded in the personal books of accounts. 

2. Dual Aspect Concept:  This concept is nothing but the principle of double entry system of accounting. For every debit, there must be a corresponding credit and vice versa. 

3. Money  Measurement Concept: As per this concept, only the transactions that can be measured in terms of money are recorded in the books of accounts. The transactions and events that cannot be convertible in the monetary terms or expressed in terms of money are not recorded in the business books. 

4. Cost Concept: This concept states that the value of an asset is to be determined on the basis of historical cost i.e. acquisition cost. 

5. Objective Evidence Concept: As per this concept, all accounting transactions should be evidenced and supported by objective documentary evidence. 

6. Historic Record Concept: According to this concept,  all transactions are to be recorded in the books as and when they occur in chronological manner date-wise. 

2. Accounting Concepts at Reporting Stage:The following concepts are to be observed at the time of preparation of final accounts. 

1. Going Concern Concept: The financial statements are normally prepared on the assumption that a business enterprise has indefinite life, unless there is a clear evidence to the contrary. 

2. Accrual Concept: Accounting is done on accrual basis that means income and expenses are recorded as and when they became due and not as and when they are actually received or paid. 

3. Matching Concept:  According to this concept, the expenses incurred during a specific accounting period must be matched against the revenues that are realised for that period. Hence adjustments are made for all outstanding and prepaid expenses, unearned or accrued incomes etc. 

4. Conservatism Concept: As per this concept, all future losses are provided in the books but unrealised profits are not recognized as income till their realisation. 

5. Materiality Concept: This concept states that all significant or material transactions must be disclosed or reported in the financial statements. 

6. Consistency Concept: The accounting policies are followed consistently from one period to another period. 

7. Periodicity Concept: Accounts should be  prepared after every period and not at the end of the life of business entity (generally for a period of 12 months).