Business Entity Concept According to this concept business is separate from owner. Means, while preparing accounts we must treat owner as a outside person. This leads to keeping away the personal factors which influences business factors.

Why this concept introduced

If we keep the business records along with our personal records, there may arise the problems of vague profit/loss. There is no accounting concept which says recording our personal expenses and incomes in the business books. We can’t arrive at our real profit if we do like that.

Example :-Expenses related to son’s marriage, LIC premium paid for family etc.,

2. Dual Aspect Concept

According to this concept, every transaction has two aspects. Those are Debit and Credit. Every debit has a credit and every credit has a debit. So, a change in debit results in change in credit.

For Example, You purchases a car of Rs.10,00,000 by paying cash immediately. Then there is a decrease in asset of Rs.10,00,000 in form of cash and increase in another asset of Rs.10,00,000 in the form of Car.

We will take another example, assume you have creditors of Rs.10000. You paid cash to them Rs.10,000. So, here there is a decrease in asset in the form of cash and decrease in liability in the form of creditors.

Finally, in both the cases Balance Sheet will tally because of this Dual Aspect Concept.

3. Money Measurement Concept

As per this concept, we will record only those transactions which will be measured in terms of money. Because, generally financial transactions will be prepared for the ascertainment of profit. That profit must be in monetary terms only. So, it is impossible to record non monetary transactions. Even if you record, what value you will show for that entry in books ? Measuring unit for money is taken as the currency of ruling country, means if you are preparing accounts in India then record transactions and events in terms of rupees.

Examples for Non Monetary Transactions :- Employee dismissed from job, Riots and Strikes etc.,

4. Periodicity Concept

The period for which we prepare accounts is called a Accounting Period. Take an example that a person started business. After five years he want to close it(No one wants to do business for a specific period. But it’s just an example). So, he decided to prepare accounts at the end of 5 years. Is it acceptable ? The answer is obviously no. Then there arises a question why ? The answer is “periodicity concept”. Periodicity concept describes a period in which we have to prepare accounts. Generally this period may be 6 months or 9 months or 1 year.

Why this concept ?

Because of this concept we will able to know about our product demand and sales, we can make decisions to introduce a new product or not, decision on business expansions, comparing financial statements 0f different periods etc., This results in a huge profit. Think, if you prepare accounts after 5 years, you may not be to access all these features.

In India, the period we follow is 1 April to 31 March.

5. Accrual Concept

This concept says, record the transactions and events on mercantile basis i.e., when they occur. As per accrual concept: Revenue-Expenses =Profit. Here, revenue includes received and yet to be received and expense include paid and yet to be paid. For example, if you have to pay salary to your employee in February. Because of losses you promised him that you will pay it in March. So, here you have to record February month’s salary in February only as outstanding salary as per this concept.

Why this concept ?

Assume there is no Accrual Concept. Then you will record the transaction whenever actual payment/receipt was done. For Example, you promised your business premises owner that you will pay rent Rs.5,00,000 of year 2016 in year 2017. So, then you will get a high profit in 2016 because you didn’t recorded the expense and low profit or even loss in 2017 because you recorded the expense of previous year and current year, in this year.

So, finally we can conclude that without accrual concept we cannot arrive at real profit.

6. Matching Concept

As per this concept, all expenses matched with the revenue of that period should only taken into consideration. According to this concept,

Periodic profit = Periodic Revenue – Matched Expenses.

We should deduct the expenses of a period from the revenue of that period only. This concept will reflect while preparing the Trading and Profit and Loss account and Balance Sheet.

7. Going Concern Concept :

Basically it is an assumption. Generally, we will prepare financial statements on the assumption that the business will continue for a far long period. So, this concept makes an assumption that business doesn’t have an intention to liquidate.

For Example, if a company purchases a machinery with a life of 5 years. Is that company purchased that machine to sale ? No, it purchased that machine to generate some revenue. Means, here we can assume that it has an intention to continue business for coming 5 years (because it purchased machinery with a life of 5 years). Generally going concern ignores the change in value of asset in short run.

8. Cost Concept

This concept says that, the value of an asset should be determined on the basis of historical cost or acquisition cost. Means record the assets at cost at which you have purchased. For Example, if you purchased a machinery for Rs.5,00,000 then record the machinery at Rs.5,00,000 only, till the end of it’s life. Traditionally we followed cost concept in order to maintain objectivity. But cost concept have lot of distortions. For Example, if you purchased a land before 20 years for Rs.5,000. But now the value of land is Rs.50,00,000. Will you record that land at Rs.5,000 only. Absolutely No. Because if you record that land at Rs.5,000 the Balance Sheet will not reflect true figure. So, cost concept creates such type of controversies. Hence now a days, in many circumstances, cost concept is not followed.

9. Realisation Concept

As per the realization concept, recognize income only when actually realized. Means any change in value of an asset shall be recorded only when business realizes it. For Example, if you received any advance for service offered by customer, then recognize that income only when you rendered the service. It follows some what conservative principle, because it covers all the possible losses but doesn’t cover any gains. This concept doesn’t applies to Revaluation Reserve. This is the most significant concept now a days.

10. Conservatism

This concept states that accountant should anticipate only losses but not gains/incomes. This concept is also called as prudence concept. Then there arises a question how should we anticipate losses. For Example, think you have a debtor of Rs.10,000. He is incapable to pay us money. So, you may record him as bad debts. But if you anticipate that your gains next year will be Rs.6,000. Can you record it as upcoming gains. You can’t, because of this conservatism concept. It says that record only anticipated losses but not anticipated gains.

11. Consistency Concept

As per this concept, we have to prepare financial statements, as per the same accounting policies which we are followed first. It is basically an assumption. For Example, if you used straight line method for calculating depreciation in the first year then this concept will assume that you will use this method only for depreciation consistently for the coming financial years also. This leads to the comparison and decision making. But in some cases we may change the accounting policies which we are followed. You can change the policies in accordance with Accounting Standards and Law.

12. Materiality

As per this concept, we will consider only significant items while preparing the financial statements. This principle is an exception for Disclosure policies. Why will consider here only significant items? For example, if the business purchased a calculator, Note Books, Calendars etc., can you record them as transactions? No, because the amount of books and calculators are very small. It creates a negative impression to the users on the financial statements and it’s also an extra work to the accountants. Because the users doesn’t want this type of information.

So, that’s the end of Accounting Concepts.

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