Accounting Concepts

 

There are some assumptions on which accounting is based. These are general notions and hence they are called concepts. These concepts can also be termed as ground rules that govern accounting. In accountancy following concepts are very popular

(i) Accounting Period Concept

Every Business wants to know the result of his investments and efforts after a certain period of time, Usually this period is one year which is regarded as ideal period of accounting. It may also be 2 years, 6 months or 3 months depending on the nature of business. This period is called accounting period.

Effects of this Concept:

(a) Financial Position of one year can be compared with the another year

(b) Earning Capacity can be compared with another

(c) These comparison help the management in planning and increasing the efficiency of business

(ii) Money Measurement Concept:

Only such transactions and events that can interpreted in terms of money are recorded Those transactions which cannot be expressed in terms of money fall beyond the scope of accounting, even though the event may be very important.

example : a proprietor has 400 chairs, 10 machines,500 acres of land and 200 tables. He can not add them, but by finding out their value in money, total amount of all these can be found out.

Effects of this concept:

(a) In the absence of this concept, it would not have been possible to add various possessions.

(b) Ability of the board of directors,qality of articles produced and efficiency of workers cannot be recorded as these are not expressed in terms of money, Thus this concept has both merits and demerits.

(iii) Business/Separate Entity Concept:

Accounting will always make a distinction between the Business/undertaking and the Proprietors . Even in the case of sole proprietorship the firm will be distinguished from the owner and all the transactions will be recorded in the books of business and not in the books of Proprietor. According to this concept the Owner/Proprietor  is treated as Creditor for the business. Thus this concept requires to make distinction between

(i) Personal Transactions and (ii) business transactions of the entity in order to ascertain financial position and operating result of business entity.

Effects of this concept:

(i) Financial position of the business can easily be found out.

(ii) Earning capacity of business can be easily ascertained.

(iv) Going Concern Concept:

The concept relates with the indefinite long economical life of the business. Transactions are there for recorded in such a manner that the benefits likely to accrue in future from money spent now or the future consequences of the events occurring now are also taken into consideration.

example : Purchase of Machinery which would last say for next 10 years. The cost of machine will be spread on a suitable basis over next 10 years for ascertaining the profit or loss each year.

Effects Of this Concept:

(i) Working life of assets is taken into consideration for writing off depreciation because of this concept.

(ii) Whatever bad position of the business may be, it does not effect on the accounting aspect of business.

(v) Cost Concept

According to this concept fixed assets are recorded as the price which they are acquired The Price is termed as Cost.

ex: a piece of land is considered to be worth Rs 4 Lakhs but it is purchased for Rs 1 Lakhs the accounting will be done on 1 lakhs as both purchaser and seller for that figure only.

In this concept the assets do not appear in accounts at cost price every year but systematically it is reduced by the amount of annual depreciation every year which is know as book value(cost-depreciation).

Effects of this concept:

(i)  Due to this concept, market price is ignored and balance sheet indicates financial position on cost and expired cost basis.

(ii) This concept is mainly for fixed assets, current assets are not effected by it. They appear in Balance sheet at cost or market price, which ever is lower.

(vi) Dual Aspect Concept

Dual aspect concept is that every transaction affects two accounts. This is why double entry system came into existence. All business transaction are recorded on the basis of this concept. No transaction is complete without double aspect.

example : When the proprietor starts the business and invest a sum of amount, the firm will have so much money but, also, the firm will owe that amount to the proprietor(owners equity or capital)

Effects of this Concept:

(i) if one aspect of a transaction is recorded and other is ignored, the accountancy record will not indicate true position, hence this concept is of great help in indicating true position of business.

(ii) This concept helps in decting the errors of employees and in having strict control over them.

(vii) Accrual Concept

If a transaction has been entered into or an event has occurred, its consequences must follow, i.e. the amount of assets and liabilities will be effected by the various transactions and events. it is important to record the consequences of all transactions. Without such a recording the accounting information will be incomplete and even misleading.

Effects of this Concept:

(i) Cash and Credit both types of transaction are recorded under this concept.

(ii) it helps in finding out the earning capacity of the enterprise during the year.

(iii) It helps in assessing the financial position of an enterprise at the close of the year.