Hi, Tell me some information about accounting concepts?
There are the necessary assumptions or conditions upon which accounting is based. Accounting concepts are postulates, assumptions or conditions upon which accounting records and statement are based. The various accounting concepts are as follows: 1. Entity Concept: For accounting purpose the “business” is treated as a separate entity from the proprietor(s). One can sell goods to himself,, but all the transactions are recorded in the book of the business. This concepts helps in keeping private affairs of the proprietor away from the business affairs. E.g. If a proprietor invests Rs. 1,00,000/- in the business, it is deemed that the proprietor has given Rs. 1,00,000/- to the “business” and it is shown as a “liability” in the books of the business. Similarly, if the proprietor withdraws Rs. 10,000/- from the business, it is charged to them. 2. Dual Aspect Concept: As per this concept, every business transaction has a dual affect. For example, if Ram starts business with cash Rs. 1,00,000/- there are two aspects of the transaction: “Asset Account” and “Capital Account”. The business gets asset (cash) of Rs. 1,00,000/- and on the other hand the business owes Rs. 1,00,000/- to Ram. 3. Going Business Concept (Continuity of Activity): It is assumed that the business concern will continue for a fairly long time, unless and until has entered into a state of liquidation. It is as per this assumption, that the accountant does not take into account the forced sale values of assets while valuing them. 4. Money measurement concept: As per this concept, in accounting everything is recorded in terms of money. Events or transactions which cannot be expressed in terms of money are not recorded in the books of accounts, even if they are very important or useful for the business. Purchase and sale of goods, payment of expenses and receipt of income are monetary transactions which are recorded in the accounting books however events like death of an executive, resignation of a manager are such events which cannot be expressed in money. 5. Cost Concept (Objectivity Concept): This concept does not recognize the realizable value, the replacement value or the real worth of an asset. Thus, as per the cost concept a) as asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and b) this cost is the basis for all subsequent accounting for the asset. For example, if a machine is purchased for Rs. 10,000/- it is recorded in the books at Rs. 10,000/- and even if its market value at the time of the preparation of the final account is Rs. 20,000/- or Rs. 60,000/- the same will not considered. 6. Cost-Attach Concept: This concept is also known as “cost-merge” concept. When a finished good is produced from the raw material there are certain process and costs which are involved like labor cost, power and other overhead expenses. These costs have a capacity to “merge” or “attach” Match the Bird Saga - Best Android Game when they are broughtr together. 7. Accounting Period Concept: An accounting period is the interval of time at the end of which the income statement and financial position statement (balance sheet) are prepared to know the results and resources of the business. 8. Accrual Concept: The accrual system is a method whereby revenue and expenses are identified with specific periods of time like a month, half year or a year. It implies recording of revenues and expenses of a particular accounting period, whether they are received/paid in cash or not. 9. Period Matching of Cost and Revenue Concept: This concept is based on the period concept. Making profit is the most important objective that keeps the proprietor engaged in business activities. That is why most of the accountant’s time is spent in evolving techniques for measuring the profit/profitability of the concern. To ascertain the profit made during a period, it is necessary to match “revenues” of the period with the “expenses” of that period. Income (profit) earned by the business during a period is compared with the expenditure incurred to earn the revenue. 10. Realization Concept: According to this concept profit, should be accounted for only when it is actually realized. Revenue is recognized only when sale is affected or the services are rendered. However, in order to recognize revenue, receipt of cash us not essential. Even credit sale results in realization as it creates a definite asset called “Account Receivable”. However there are certain exception to the concept like in case of contract accounts, hire purchase etc. Similarly incomes like commission interest rent etc. are shown in Profit and Loss A/c on accrual basis though they may not be realized in cash on the date of preparing accounts. 11. Verifiable Objective Evidence Concept: According to this concept all accounting transactions should be evidenced and supported by objective documents. These documents include invoices, contract, correspondence, vouchers, bills, passbooks, cheque etc.
According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations.
1) Business Entity Concept 2) Dual Aspect Concept 3) Going Concern Concept 4) Accounting Period 5) Concept Cost Concept 6) Money Measurement Concept 7) Matching Concept
> Accounting concepts --Accounting Concepts and Principles are a set of broad conventions that have been devised to provide a basic framework for financial reporting. As financial reporting involves significant professional judgments by accountants, these concepts and principles ensure that the users of financial information are not mislead by the adoption of accounting policies and practices that go against the spirit of the accountancy profession. Accountants must therefore actively consider whether the accounting treatments adopted are consistent with the accounting concepts and principles. --In order to ensure application of the accounting concepts and principles, major accounting standard-setting bodies have incorporated them into their reporting frameworks such as the IASB Framework. > Following is a list of the major accounting concepts and principles: Relevance Reliability Matching Concept Timeliness Neutrality Faithful Representation Prudence Completeness Single Economic Entity Concept Money Measurement Concept Comparability/Consistency Understandability Materiality Going Concern Accruals Business Entity Substance over Form Realization Concept Duality Concept --In case where application of one accounting concept or principle leads to a conflict with another accounting concept or principle, accountants must consider what is best for the users of the financial information. An example of such a case would be the trade off between relevance and reliability. Information is more relevant if it is disclosed timely. However, it may take more time to gather reliable information. Whether reliability of information may be compromised to ensure relevance of information is a matter of judgment that ought to be considered in the interest of the users of the financial information
Hie Rakesh, Rules of accounting that should be followed in preparation of all accounts and financial statements. The four fundamental concepts are (1) Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out; (2) Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise; (3) Going concern: the business entity for which accounts are being prepared is in good condition and will continue to be in business in the foreseeable future; (4) Prudence concept (also conservation concept): revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is reasonable 'possibility' of incurring them. Other concepts include (5) Accounting equation: total assets equal total liabilities plus owners' equity; (6) Accounting period: financial records pertaining only to a specific period are to be considered in preparing accounts for that period; (7) Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value; (8) Entity: accounting records reflect the financial activities of a specific business or organization, not of its owners or employees; (9) Full disclosure: financial statements and their notes should contain all relevant data; (10) Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower); (11) Maintenance of capital: profit can be realized only after capital of the firm has been restored to its original level, or is maintained at a predetermined level; (12) Matching: transactions affecting both revenues and expenses should be recognized in the same accounting period; (13) Materiality: minor events may be ignored, but the major ones should be fully disclosed; (14) Money measurement: the accounting process records only activities that can be expressed in monetary terms (with some exceptions); (15) Objectivity: financial statements should be based only on verifiable evidence, including an audit trail; (16) Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off; (17) Unit of measurement: financial data should be recorded with a common unit of measure (dollar, pound sterling, yen, etc.).
1) Business Entity Concept 2) Dual Aspect Concept 3) Going Concern Concept 4) Accounting Period 5) Concept Cost Concept 6) Money Measurement Concept 7) Matching Concept Explain the following: a) Business Entity Concept:
MODULE - 1 Basic Accounting Notes 17 Accounting Concepts ACCOUNT ANCY In the previous lesson, you have studied the meaning and nature of business transactions and objectives of financial accounting. In order to maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. These are foundations of preparing and maintaining accounting records. In this lesson we shall learn about various accounting concepts, their meaning and significance. OBJECTIVES After studying this lesson, you will be able to : l explain the term accounting concept; l explain the meaning and significance of various accounting concepts : Business Entity , Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realisation Concept, Accrual Concept and Matching Concept. 2.1 MEANING AND BUSINESS ENTITY CONCEPT Let us take an example. In India there is a basic rule to be followed by everyone that one should walk or drive on his/her left hand side of the road. It helps in the smooth flow of traf fic. Similarly , there are certain rules that an accountant should follow while recording business transactions and preparing accounts. These may be termed as accounting concept. Thus, this can be said that : Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. 2 ACCOUNTING CONCEPTS ACCOUNT ANCY MODULE - 1 Notes Accounting Concepts Basic Accounting 18 The main objective is to maintain uniformity and consistency in accounting records. These concepts constitute the very basis of accounting. All the concepts have been developed over the years from experience and thus they are universally accepted rules. Following are the various accounting concepts that have been discussed in the following sections : l Business entity concept l Money measurement concept l Going concern concept l Accounting period concept l Accounting cost concept l Duality aspect concept l Realisation concept l Accrual concept l Matching concept Business entity concept This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent 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 from the business cash/goods for his/her 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 the person owning the business. This concept is the very basis of accounting. Let us take an example. Suppose Mr . Sahoo started business investing Rs100000. He purchased goods for Rs40000, Furniture for Rs20000 and plant and machinery of Rs30000. Rs10000 remains in hand. These are the assets of the business and not of the owner . According to the business entity concept Rs100000 will be treated by business as capital i.e. a liability of business towards the owner of the business. Now suppose, he takes away Rs5000 cash or goods worth Rs5000 for his domestic purposes. This withdrawal of cash/goods by the owner from the MODULE - 1 Basic Accounting Notes 19 Accounting Concepts ACCOUNT ANCY business is his private expense and not an expense of the business. It is termed as Drawings. Thus, the business entity concept states that business and the owner are two separate/distinct persons. Accordingly , any expenses incurred by owner for himself or his family from business will be considered as expenses and it will be shown as drawings. Significance The following points highlight the significance of business entity concept : l 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. l This concept restraints accountants from recording of owner ’ s private/ personal transactions. l It also facilitates the recording and reporting of business transactions from the business point of view l It is the very basis of accounting concepts, conventions and prin
Accounting concepts are those basis assumptions upon which basic process of accounting is based. Following are the basic accounting concepts: 1) Business Entity Concept 2) Dual Aspect Concept 3) Going Concern Concept 4) Accounting Period 5) Concept Cost Concept 6) Money Measurement Concept 7) Matching Concept Explain the following: a) Business Entity Concept: According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations. b) Dual Aspect Concept: According to this concept, every transaction has two affects. This basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same. c) Going Concern Concept: According to this concept, the organization is going to be in existence for an indefinite period of time and is not likely to close down the business in the shorter period of time. This affects the valuation of assets and liabilities. d) Accounting Period Concept: According to this concept, the indefinite period of time is divided into shorter time periods, each one being in the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis. Selection of accounting period depends on characteristics like business organization, statutory requirements etc. e) Cost Concept: According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current market prices of various assets. f) Money Measurement Concept: According to this concept, only those transactions find place in the accounting records, which can be expressed in terms of money. This is the major drawback of financial accounting and financial statements. g) Matching Concept: According to this concept, while calculating the profits during the accounting period in a correct manner, all the expenses and costs incurred during the period, whether paid or not, should be matched with the income generated during the period.