ACCOUNTING CONCEPTS AND PRINCIPLES

ACCOUNTING CONCEPTS

Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared. The word concept means idea or notion, which has universal application. These concepts are based on such assumptions and conditions which form the basis upon which the accounting has been laid. These accounting concepts lay the foundation on the basis of which the accounting principles are formulated. Following are the widely accepted accounting concepts:

1. Entity Concept
   • The business enterprise is different from its owner and the accountant should treat the same as the business is distinct from its owner. The accounting of both the business and the owner are done in their respective books of accounts. This can be easily understood with the term Double-Entry Book-Keeping. This concept is applied to all types of entities.
   • As the Enterprise is liable for the investment made by the owner which is the capital invested in the enterprise which is called risk capital for which the owner will receive profit from the enterprise.
2. Money Measurement Concept
   • As the term itself says about the whole concept i.e. only those transactions will be considered and recorded which can be measured in terms of MONEY.
   • As money is the only medium of exchange and such transactions are being capable to be recorded in books of accounts i.e. any transaction or event which can not be measured in terms of money can not be recorded in the books of accounts.
   • The measuring unit of money is taken as the currency of the ruling country and in the case of transactions between two or more countries in such a case at a uniform monetary unit, the transaction will be recorded.
   • Any transaction and event which is material but can not be measured in terms of money will be not be recorded in the books of accounts.
3. Periodicity Concept
   • As per the Going Concern concept, the life of the entity is assumed to be of an indefinite period, but it is not possible to measure the performance at the end of the life of the entity. So, to measure the performance of the entity a period has been specified in which the performance of the entity will be seen, and accordingly, the result of such will be displayed in the financial statements of the company.
   • The period for such could be 6 months or 9 months or 15 months in which the performance will be measured of the entity. Usually, this period is for one calendar year and in INDIA it is from 1st April to 31st March of the immediately following year.
4. Accrual Concept
   • Under this concept, the transactions are being recognized on a mercantile basis i.e. to be recorded as and when they occur and in the period to which they relate and not on the time in which the cash is received or paid.
   • This helps the users to have information about past and future events and accordingly the obligation of future payments that may arise and the pending dues of the past at the same time can be seen through the financial statements.
5. Matching Concept
   • In this concept, the concern is to record only those expenses and revenues which are related to that particular period only, and only such shall be considered and recorded. In addition to it if there is any revenue that has been recognized then expenses incurred to earn such revenue shall also be taken into consideration.
   • The concept read earlier to this concept i.e. the Accrual Concept has more relevance and will help in understanding better this concept that all such expenses and revenue occurred shall be considered irrespective of the inflow or outflow of cash of such occurrence. but along with the Accrual Concept, the Periodicity Concept is to be considered while applying the matching concept.
6. Going Concern Concept
   • The preparation of the financial statements is made on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. In other words, the entity has no intention of liquidating the entity nor there is any need for such at present but if at any point such assumption is changed and preparation of the financial statements has been done on the different assumption in such a case the basis needs to be disclosed.
7. Cost Concept
   • As per this concept, the cost of an asset would be determined on the basis of historical cost i.e. acquisition cost. Although there are various measurement basis, accountants traditionally prefer this concept in the interest of objectivity.
8. Realisation Concept
   • This concept talks about the situation where the change in value of an asset is to be recorded only when the business realises it. The historical cost and the current cost could be different but till such change is material and it is certain then only such change is to be recorded else ignore it.
9. Dual Aspect Concept
   • The book-keeping of the data is done on the basis of the double-entry book-keeping system and this concept clarifies the same that every transaction or event has TWO aspects such as:
     • It Decreases Liability, Increases another Liability;
     • It Increases a Liability, Increases an Asset;
     • It Decreases Liability, Decreases an Asset;
     • It Increases one Liability; Decreases other Liability Alternatively:
     • It Decreases one Asset, Increases another Asset;
     • It Increases an Asset and Simultaneously Increases Liability;
     • It Increases one Asset and Decreases other Asset;
     • It Decreases one Asset, Decreases a Liability.
10. Conservatism
    • In this concept, it states that the accountant should not anticipate income and all possible losses should be present in the books of accounts while recording the transactions. And in the case where there is more than one value of an asset the lower one shall be considered and a Golden Rule of such recording of the value of an asset is there where it is said to value the asset on the Lower of Cost or Market Price whichever is Lower.
    • Following are the # Qualitative characteristics of financial statements:
      • PRUDENCE
        • Judgment about gains that are uncertain and the possible future losses which may arise.
      • Faithful representation of Alternative Values
      • NEUTRALITY
        • The recording of uncertain gains and possible future losses shall be done being unbiased while recording such transactions.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS

Accounting is based on some assumptions which are the same for types of entity which are s follows:

1. Going Concern
2. Consistency
3. Accrual

CHARACTERISTICS OF FINANCIAL STATEMENTS

The following are the important characteristics of the financial statements:

1. Understandability
2. Relevance
3. Reliability
4. Comparability
5. Materiality
6. Substance Over Form
7. Faithful Representation
8. Completeness
9. Full, Fair, and Adequate Disclosure
10. Prudence
11. Neutrality

ACCOUNTING PRINCIPLES

Accounting principles are associated with the theory and procedures of accounting which serves as a guide for the selection of conventions or procedures and such must satisfy the following conditions:

• They must be followed consistently;
• They should be able to reflect future predictions;
• They must be simple, understandable, and explanatory;
• They should be informative for the users;
• They should be based on realistic assumptions.