acconting concepts

The most important concepts of accounting are as follows:

	Business Entity Concept
	Money Measurement Concept
	Going Concern Concept
	Cost Concept
	Dual Aspects Concept
	Accounting Period Concept
	Matching Concept
	Accrual Concept
	Objective Evidence Concept

The first two accounting concepts, namely, Business Entity Concept and Money
Measurement Concept are the fundamental concepts of accounting. Let us go
through each one of them briefly:Business Entity ConceptAccording to this concept, the business and the owner of the business are two
different entities. In other words, I and my business are separate.
For example, Mr A starts a new business in the name and style of M/s Independent
Trading Company and introduced a capital of Rs 2,00,000 in cash. It means the
cash balance of M/s Independent Trading Company will increase by a sum of Rs
2,00,000/-. At the same time, the liability of M/s Independent Trading Company
in the form of capital will also increase. It means M/s Independent Trading
Company is liable to pay Rs 2,00,000 to Mr A.Money Measurement ConceptAccording to this concept, “we can book only those transactions in our accounting
record which can be measured in monetary terms.”ExampleDetermine and book the value of stock of the following items:
Shirts Rs 5,000/-
Pants Rs 7,500/-

Coats 500 pieces
Jackets 1000 pieces
Value of Stock = ?
Here, if we want to book the value of stock in our accounting record, we need the
value of coats and jackets in terms of money. Now if we conclude that the values of
coats and jackets are Rs 2,000 and Rs 15,000 respectively, then we can easily book
the value of stock as Rs 29,500 (as a result of 5000+7500+2000+15000) in our
books. We need to keep quantitative records separately.Going Concern ConceptOur accounting is based on the assumption that a business unit is a going concern.
We record all the financial transaction of a business in keeping this point of view
in our mind that a business unit is a going concern; not a gone concern. Otherwise,
the banker will not provide loans, the supplier will not supply goods or services,
the employees will not work properly, and the method of recording the transaction
will change altogether.
For example, a business unit makes investments in the form of fixed assets and
we book only depreciation of the assets in our profit & loss account; not the
difference of acquisition cost of assets less net realizable value of the assets. The
reason is simple; we assume that we will use these assets and earn profit in the
future while using them. Similarly, we treat deferred revenue expenditure and
prepaid expenditure. The concept of going concern does not work in the following
cases:

  	If a unit is declared sick (unused or unusable unit). When a company is going to liquidate and a liquidator is appointed for the same. When a business unit is passing through severe financial crisis and going to wind up.


Cost ConceptIt is a very important concept based on the Going Concern Concept. We book the
value of assets on the cost basis, not on the net realizable value or market value
of the assets based on the assumption that a business unit is a going concern. No
doubt, we reduce the value of assets providing depreciation to assets, but we
ignore the market value of the assets.
The cost concept stops any kind of manipulation while taking into account the net
realizable value or the market value. On the downside, this concept ignores the
effect of inflation in the market, which can sometimes be very steep. Still, the cost
concept is widely and universally accepted on the basis of which we do the
accounting of a business unit.

Dual Aspect ConceptThere must be a double entry to complete any financial transaction, means debit
should be always equal to credit. Hence, every financial transaction has its dual
aspect: we get some benefit, and we pay some benefit.
For example, if we buy some stock, then it will have two effects: the value of stock will increase (get benefit for the same amount), and it will increase our liability in the form of creditors.

Transaction	Effect
Purchase of Stock for Rs 25,000	Stock will increase by Rs 25,000 (Increase in debit balance) Cash will decrease by Rs 25,000 (Decrease in debit balance) Or Creditor will increase by Rs 25,000 (Increase in credit balance)

AccountingPeriod ConceptThe life of a business unit is indefinite as per the going concern concept. To
determine the profit or loss of a firm, and to ascertain its financial position, profit
& loss accounts and balance sheets are prepared at regular intervals of time,
usually at the end of each year. This one-year cycle is known as the accounting
period. The purpose of having an accounting period is to take corrective measures
keeping in view the past performances, to nullify the effect of seasonal changes,
to pay taxes, etc.
Based on this concept, revenue expenditure and capital expenditure are
segregated. Revenues expenditure are debited to the profit & loss account to
ascertain correct profit or loss during a particular accounting period. Capital
expenditure comes in the category of those expenses, the benefit of which will be
utilized in the next coming accounting periods as well.
Accounting period helps us ascertain correct position of the firm at regular
intervals of time, i.e., at the end of each accounting period.Matching ConceptMatching concept is based on the accounting period concept. The expenditures of
a firm for a particular accounting period are to be matched with the revenue of
the same accounting period to ascertain accurate profit or loss of the firm for the
same period. This practice of matching is widely accepted all over the world. Let
us take an example to understand the Matching Concept clearly.

The following data is received from M/s Globe Enterprises during the period 01-
04-2012 to 31-03-2013:

Particulars

Amount

1. Sale of 1,000 Electric Bulbs @ Rs 10 per bulb on cash basis. 2. Sale of 200 Electric Bulb @ Rs. 10 per bulb on credit to M/s Atul Traders. 3. Sale of 450 Tube light @ Rs.100 per piece on Cash basis. 4. Purchases made from XZY Ltd. 5. Cash paid to M/s XYZ Ltd. 6. Freight Charges paid on purchases 7. Electricity Expenses of shop paid 8. Bill for March-13 for Electricity still outstanding to be paid next year.

10,000.00 2,000.00 45,000.00 40,000.00 38,000.00 1,500.00 5,000.00 1,000.00

Based on the above data, the profit or loss of the firm is calculated as follows:

Particulars	Amount	Total
Sale Bulb Tube Less:- Purchases Freight Charges Electricity Expenses Outstanding Expenses	12,000.00 45,000.00 40,000.00 5,000.00 1,500.00 1,000.00	57,000.00 47,500.00
Net Profit	9,500.00

In the above example, to match expenditures and revenues during the same
accounting period, we added the credit purchase as well as the outstanding
expenses of this accounting year to ascertain the correct profit for the accounting
period 01-04-2012 to 31-03-2013.

It means the collection of cash and payment in cash is ignored while calculating
the profit or loss of the year.Accrual ConceptAs stated above in the matching concept, the revenue generated in the accounting
period is considered and the expenditure related to the accounting period is also
considered. Based on the accrual concept of accounting, if we sell some items or
we rendered some service, then that becomes our point of revenue generation
irrespective of whether we received cash or not. The same concept is applicable
in case of expenses. All the expenses paid in cash or payable are considered and
the advance payment of expenses, if any, is deducted.
Most of the professionals use cash basis of accounting. It means, the cash received
in a particular accounting period and the expenses paid cash in the same
accounting period is the basis of their accounting. For them, the income of their
firm depends upon the collection of revenue in cash. Similar practice is followed
for expenditures. It is convenient for them and on the same basis, they pay their
Taxes.Objective Evidence ConceptAccording to the Objective Evidence concept, every financial entry should be
supported by some objective evidence. Purchase should be supported by purchase
bills, sale with sale bills, cash payment of expenditure with cash memos, and
payment to creditors with cash receipts and bank statements. Similarly, stock
should be checked by physical verification and the value of it should be verified
with purchase bills. In the absence of these, the accounting result will not be
trustworthy, chances of manipulation in accounting records will be high, and no
one will be able to rely on such financial statements.