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:
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 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 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
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:
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.