Concepts In Accounting

Accounting principles are built on a foundation of a few basic concepts. These concepts are so basic that most accountants do not consciously think of them; they are regarded as being self-evident. Non-accountants will not find these concepts to be self-evident. Some accounting theorists argue that certain of the present concepts are wrong and should be changed. But in order to understand accounting, as it now exists, one must understand what the underlying concepts currently are. The different aspects are:—

• Business Entity Concept: The business is treated as a distinct (and separate) entity from the individuals who own it and accordingly accountants record transactions.
• Money Measurement Concept:  A record is made only of the information that can be expressed in monetary terms for accounting purposes. This enables addition and subtraction of varied items since money provides the common denominator.
• Cost Concept: The cost concept and the money measurement concept go hand in hand. Transactions are recorded in the books at the price paid that is the cost.
• Going Concern Concept: Accounting assumes that the business will exist indefinitely into future and accordingly transactions are recorded.
• Dual-aspect Concept: The economic resources of an entity are assets and the acquisition of an asset must be on account of: –
  • Some other assets being sold; or
  • The creation of an obligation to pay; or
  • There has been a profit owed to proprietor; or
  • The owner has contributed.
• Realisation Concept: The realisation concept indicates the amount of revenue that should be considered from a given transaction. Realization refers to inflows of cash or claims to cash.
• Accrual Concept: In a way, realisation concept has been split up into two parts, namely, production of economic goods or rendering of economic services, and realisation of due revenue.
• Accounting Period Concept: The accounting reports measure activities for a specified interval of time called the accounting period, which is usually one year and therefore termed as annual reports.