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Accounting Concepts – The A to Z Guide

The basic accounting terms that we know/ learn include revenues, expenses, assets, liabilities, income statement and statements of cash flow. The basic principles on which our finance is discussed are our revenue, historical costing, check principle/matching principle, disclosure, and our objectivity.

The market price of fixed assets is not considered. While preparing final accounts, records are made for outstanding expenses and prepaid expenses.

Different accounting methods required different accounting concepts. Accounting concepts refers “to the basic assumption and rules and principles which work as the basis of recording of business transactions and preparing accounts”

The accounting concept states that all assets are recorded in the books of accounts at their purchase price, which includes the cost of acquisition, transportation, and installation and not at its market price. 

Maintaining uniformity and consistency Is the main objective of the Accounting Concept.

The major accounting concepts are :

  • Business entity concepts
  • Money measurement concepts
  • Going concern
  • Accounting period and cost concepts
  • Accrual concepts
  • Matching/checking concepts

Basic Accounting Concepts

The basic accounting concepts helps an individual to understand the means of accounting completely.

Each accounting concept has its theory and relation to accounting.

They are related to the economy and expenses etc. and helps in a better understanding of accounting.

Accruals Concept

Accrual Concept is a journal entry that is related to recognize revenue and expenses which have been consumed or earned by any individual.

It also relates to the cash amount, which has not been paid or received yet. This concept is related to know how much revenue and expenses have been recognized at a certain period.

Without this concept, a business will not be able to recognize its profit and loss status. 

Example: Money lender had issued a loan from the bank and always sends an invoice every month, in which in detail, the amount of interest is mentioned. The borrower will record the interest value in advance by recording the accrual interest value.

Conservatism Concept

Conservatism Concept mainly recognizes the expenses and liabilities when there is uncertainty about the outcomes related to recognizing the assets and liabilities which are to be received.

Under this concept, if there is any uncertainty about a loss, the company should tend towards the loss and should recognize it. Whereas, if there is again, then the company should not recognize the gain.

Example: The entity or the person should recognize the liability of the country and should put a claim to the individual to ensure if they are failing or not. Whatever value it will be should be in the highest value and should be recognized.

Consistency Concept

Consistency Concept means that if any method once is used in the business, then that particular method should be again and again be used in the future.

For any reason or problem, the policies of the company are changed, then the business should also change its nature.

The reasons for change and the effects of change on the business must be recorded in the financial statements of the business.

Example: A company uses the depreciation method for its equipment. According to the concept, the company should use the same method and should record the changes in their balance sheet.

Economic Entity Concept

The main aim of this concept is to keep the economic transactions different or keep it away from the owners of the business.

By doing so, there is no chance of having any personal dilemma or relation concerning the economic terms.

It’s used in most of the company companies as everyone prefers to keep their professional lives away from personal lives which will be better for the individual as well as for the company.

Example: In a partnership firm, the partners and the firm are both separate entities. 

Going Concern Concept

The financial principles or statements by the business are prepared in the assumption that the business will remain operating in the future.

In this assumption, the revenue and expenses can be deferred in the future at a time when the company is still operating.

If not accounted for or recognized, then all the transactions which are taking place will be taken into consideration into the current period.

Example: Companies prepay or accrue the expenses as they believe that the business will operate in the future.

Matching Concept

The main principle of this concept is that if the revenue is, which is created by the company at a period should be taken into consideration in the same period and should be recorded in the same period.

No considerations will be reported after the period will be delayed, which can cause a problem in the final transaction sheets or balance of the company.

Thus, one should make sure to revise and submit accordingly.

Example: The company should not record expenses until and unless the revenue is not generated. 

Materiality Concept

The main belief of this concept is that the after the readers of the company will make the decision related to the financial statements of the company, transactions made by the company cannot be recorded after that.

Mainly small-sized transactions are recorded, which represent the total amount resulting in the financial results, financial position of the business and also helps in stating the cash flow statement of the business.

Example: A company is expensing over a $50 basket, in the year in which it is meant to depreciate, instead of acquiring it till the upcoming ten years announced by the company readers.

Accounting Concepts and Conventions

Accounting concepts and conventions are the principles or assumptions which the company follows while recording the transactions made by the business.

They are important as they indicate the understanding of one’sone’s towards the business related to the financial statements as well. 

  • Full disclosure
  • Two values of a transaction should be available.
  • Lower value transactions are always recorded.
  • Consistency and materiality are the most important points or concepts.

The assumption on which accounting is based:

A concept is a self-evident proposition, i.e., something taken for granted. There is no authoritative list of the concepts.

Significance of Accounting concepts

Concepts are those basic assumptions and condition which form the basis upon which the accountancy has been laid

  • The Accounting concept helps in ascertaining the profit of business expenses and revenue.
  • This concept restrained accountants from a recording of the owner’s private/personal transaction
  • It also facilitates the recording and reporting of business transactions from the business point of view.

Money measurement concepts assume that all business transactions must be recorded in the books of accounts in terms of money. Accounting concepts states that all assets are recorded in the books of accounts at their cost price.

Accounting concept is a vast function, it varies depending on the purpose it is used for, on the other hand, cost accounting is used by management to effectively manage cost.

This accounting concept assumes that, for accounting purposes, the business enterprise and its owner are two separate independent entities. Thus, the business and personal transactions of its owner are separate.

This accounting concept assumes that, for accounting purposes, the business enterprise and its owner are two separate independent entities.

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About the Author

Rachit believes in the power of education and has studied from the top institutes of IIIT Allahabad, IIM Calcutta, and Francois Rabelias in France. He has worked as Software Developer with Microsoft and Adobe. Post his MBA, he worked with the world’s # 1 consulting firm, The Boston Consulting Group across multiple geographies US, South-East Asia and Europe.

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