Basic accounting concepts

Basic accounting concepts

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  Basic Accounting Concepts PAGE 1
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  Basic Accounting Concepts  Business entity Money measurement  Going concern  Accounting period  Cost  Dual aspect (or Duality)  Revenue recognition (Realisation)  Matching  Full disclosure  Consistency  Conservatism (Prudence)  Materiality  Objectivity PAGE 2
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  Business entity This conceptassumes that the entity of business is different from its owners. For accounting purpose, the business is treated as a unit or entity separate from the person who controls it. Accounting Concepts PAGE 3
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  Money Measurement Concept  According tothis concept, transactions that can be measured in terms of money only are recorded in the books of accounts PAGE 4
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  Going Concern Concept  Accordingto this concept, it is assumed that the business will last for a long time. Based on this concept we are charging depreciation on fixed assets every year till the end of its life, that the cost of asset which has been used during a period should be charged from the revenue of that period itself. PAGE 5
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  Accounting period  The periodof interval for which accounts are prepared to know the profit or loss and what exactly the financial position of the business is called accounting period PAGE 6
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  Cost Concept  Thisprinciple assumes that all assets are to be recorded at the total amount paid to acquire them and this cost is the basis for all subsequent accounting for those assets. The cost of acquisition includes the cost of purchase of asset, the expenses incurred for bringing them to the location and the installation expenses PAGE 7
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  Dual aspect principle  Thisis the basic principle of accounting. According to this concept every transaction has two aspects; they are receiving aspect and giving aspect. In other words, at least two accounts are involved in recording a transaction PAGE 8
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  Revenue Recognition Concept  Revenue isthe amount which a business earns through sale of goods or by providing services. This principle states that revenue is earned or recognized at the point of sale, when the title of goods passes from the seller to the buyer (cash or credit). But in case of an income, it is recognized on time basis. PAGE 9
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  Matching Concept  It statesthat expenses incurred in an accounting period should be matched with revenues during that period. An expense is recognized not when cash is paid but when an asset or service has been used to generate revenue PAGE 10
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  Full Disclosure Concept  Accountingstatements must be prepared honestly and should contain all relevant material information and their accompanying footnotes regarding the financial position of the business PAGE 11
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  Consistency Concept  Consistency meanscontinuity or steadiness. It means that once an accounting method is adopted, it should not be changed from one accounting period to another. If a change is adopted, the business enterprise is required to record the fact as a foot note and to show the impact of such change on financial affairs. PAGE 12
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  Conservatism Concept  This principleis also called prudence, which states that anticipated profits are not to be considered but only possible losses, while recording business transactions. PAGE 13
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  Materiality Concept  It impliesthat disclosing of items in financial statements in accordance with the relative importance they have. Certain items are materially relevant while others are not. An item of fact is considered to be material if it influences the decision making. PAGE 14
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  Objectivity Concept  This principlestates that the accounting data provided in the books of accounts should be verifiable and dependable. PAGE 15
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