Accounting Concepts refer to the basic assumptions, rules and principles which work as the basis of recording of business transactions and preparing accounts. Main Accounting Concepts are:
- Business Entity Concept
- Money Measurement Concept
- Going Concern Concept
- Dual Aspect Concept
1. Business Entity Concept
This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate 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 cash or goods from the business for 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 from the point of view of the owner.
Significance of Business Entity Concept
- This concept helps in ascertaining the profit of the business as only the business expenses and revenues are recorded and all the private and personal expenses are ignored.
- This concept restraints accountants from recording of owner’s private or personal transactions.
- It also facilitates the recording and reporting of business transactions from the business point of view.
- It is the very basis of accounting concepts, conventions and principles.
2. Money Measurement Concept
This concept assumes that all business transactions must be in terms of money that is in the currency of the concerned country. In India, such transactions are in terms of rupees (INR). Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts.
The transactions which cannot be expressed in monetary terms are not recorded in the books of accounts. For example, sincerity, loyalty and honesty of employees are not recorded in books of accounts because these cannot be measured in terms of money although they do affect the profits and losses of the business concern.
Significance of Money Measurement Concept
- This concept guides accountants what to record and what not to record.
- It helps in recording business transactions uniformly.
- If all the business transactions are expressed in monetary terms, it will be easy to understand the accounts prepared by the business enterprise.
- It facilitates comparison of business performance of two different periods of the same firm or of the two different firms for the same period.
3. Going Concern Concept
This concept states that a business firm will continue to carry on its activities for an indefinite period of time. It means that every business entity has continuity of life. Thus, it will not be dissolved in the near future.
This is an important assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet. For example, a company purchased plant and machinery of INR 1,00,000 and its life span is 10 years. According to this concept every year some amount will be shown as expense and the balance amount as an asset. Thus, if an amount is spent on an item which will be used in business for many years, it is not correct to charge the amount from the revenues of the year in which the item is acquired. Only a part of the value is shown as expense in the year of purchase and the remaining balance is shown as an asset.
Significance of Going Concern Concept
- This concept facilitates preparation of financial statements.
- On the basis of this concept, depreciation is charged on the fixed assets.
- It is of great help to the investors, because, it assures them that they will continue to get income on their investments.
- In the absence of this concept, the cost of a fixed asset will be treated as an expense in the year of its purchase.
- Because of this concept business can be judged for its capacity to earn profits in future.
4. Dual Aspect Concept
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect - it affects two accounts in their respective opposite sides.
Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. For example, goods purchased for cash has two aspects which are:
- Giving of cash
- Receiving of goods
These two aspects are to be recorded. The duality concept is commonly expressed in terms of fundamental accounting equation:
Assets = Liabilities + Capital
The above accounting equation states that the assets of a business are always equal to the claims of owner and the outsiders. Owner’s claim is also termed as capital or owner’s equity and that of outsiders, as liabilities or creditors’ equity.
- This concept helps the accountant in detecting errors.
- It encourages the accountant to post each entry in opposite sides of two affected accounts.
- It helps in preparing the Financial Position Statement/ Balance Sheet on a particular date.