Accounting Concepts

Accounting Concepts
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Entity Concept Money Measurement Concept Going Concern Concept Cost Concept Dual Aspect Concept (A=L+E) Full Disclosure Concept Objectivity Concept Accrual Concept Periodicity Concept Realization Concept (Revenue Recognition) The Matching Concept The Materiality Concept The Consistency Concept The Conservatism Concept

Entity Concept
Accounting information is maintained only for the

entities which are different from the persons associated with it Also separate accounting for multiple business of the same owner

Money Measurement Concept

Records only those transactions that can be

expressed in money Helps in recording, presenting and analysing

Going Concern Concept

Enterprise is viewed as continuing its operation for

the foreseeable future Unless there is strong evidence to the contrary it is assumed that it has neither the intention nor the necessity of liquidation or curtailing materially the scale of operations

Cost Concept
All transactions are recorded in the books of account

at the actual price involved. Acquisition cost is considered highly objective, reliable, definite and free from bias. However when due to price rise, the prices of all commodities go up substantially, the financial position of a firm depicted on cost concept basis does not reflect true picture

Dual Aspect Concept

The value of the assets owned by the company is

equal to the claims on these assets Every transaction has two-fold effect which keeps the fundamental accounting equation i.e. Assets = Liability + Equity

Full Disclosure Concept

Attempt should be made to make the information

revealed more meaningful to all those who are entitled to receive it Accounting Standard-1 (AS-1) issued by the Institute of Chartered Accountants of India mentions about Disclosure of Accounting Policies Financial statements as a means of conveying and not concealing information

Objectivity Concept
This concept implies that all accounting records

should be supported by proper documents The accounting entries are based on objectively verifiable evidence.

Accrual Concept
Revenue and costs are recognized as they are earned

or incurred (and not as money is received or paid) Depiction of true financial position of the enterprise as the costs and revenue is recognized when they are incurred.

Periodicity Concept
The going concern concept of accounting assumes that the

life of a business is perpetual. However the owners, management and other interested parties cannot wait indefinitely to know how much income has been earned by the business. Profitability of a business is to be measured periodically Period for which income is measured is called the accounting period Accounting profit is the result of completed transactions during the accounting period

Realisation Concept
Deals with timing and the amount of recording of

revenue from a given sale Revenue should be recognised when it is measurable, and at the time of sale it is not unreasonable to expect ultimate collection

Matching Concept
Determination of accounting income (or loss) by

matching the expired cost against the revenue during the period Expenses must be specifically incurred for earning the said revenue and must pertain to the same interval of time (accounting period)

Materiality Concept
Accounting does not attempt to record insignificant

events, the effort of recording which does not justify the usefulness of the results

Consistency Concept
Accounting policies followed by an enterprise should

be consistently followed Any change from existing policy that has a material effect on the financial statements should be disclosed

Conservatism Concept
Anticipate no profits; provide for possible losses

Recognise revenues only when they are reasonably

certain; recognise expenses as soon as they are reasonably possible