What is the meaning of Accounting Concepts?
Business Entity Concept
This is generally accepted that as per this concept the business enterprises a separate entity from a person who owns it.
This concept is very useful in keeping business affairs or business transactions, the business is free from the effect of private affairs of the proprietors.
Imagine that absence of this concept the private affairs and business affairs are combined or mixed together in such a way that the profit or loss business enterprise can not be ascertained nor get the true picture of business enterprise’s financial position.
We can take here an example if the business owner has taken Rs. 5000/-INR form the business for paying house tax for his residence, the amount should be deducted from his capital account as drawings if we added this amount to the other business expenses then the profit will be reduced by Rs. 5000/-INR and also his capital by this same amount. This transaction affects the results of the business and also its financial positions.
Not only this it affects the profit is, but the consequential tax payment also will be less which is against the provisions of the Income Tax Act.
Going Concern Concept
As per this concept assume that without there is valid evidence the business enterprise will continue to a long period in the future.
With the help of Going Concerns Concept that the accountant while valuing the assets of the enterprise does not take into account their current resale values as there is no immediate expectation of selling it.
Moreover, the depreciation on fixed assets is charged on the basis of their expected lives rather than on their market values. You should need to know about the Principle of Accounting in “Convention of Conservatism”
When there is strong evidence shown that the business enterprise has a limited life the but accounting procedures or accounting concept should be as it is followed what this Going Concern Concept said.
And now the question has arisen what should need to do In such cases, the financial statements should clearly disclose the limited life of the enterprise and should you should need to understand what principle of accounting said in “Convention of full disclosure”
Money Measurement Concept
As per the Money Measurement concept accounting records should be maintained which expressed in Monetary Term.
Mainly two definitions on accounting which emphasized this concept as given by The American Institute of Certified Public Accountants and American Accounting Principles Board.
The importance of this concept is that money provides a common denomination by means of which heterogeneous facts about a business enterprise.
It can be expressed and measured in a much better way by the following example:-
- Rs. 10,00,000 cash
- 500 tons of raw materials
- 10 Machinery items
- 30,000 square meters of land and building etc.
Those amounts cannot be added together to produce a meaningful total of what the business owns. Instead of we can expressing these items in monetary terms which as follow:-
- Rs. 10,00,000 cash
- Rs 5,00,000 of raw materials,
- Rs, 10,00,000 for machinery items
- Rs 30,00,000 land and building
But limitations of this concept is that accounting does not take into account which are non-monetary items which maybe affect the enterprise.
For Example, accounting does not give information about, serious misunderstanding between the production and sales manager which have serious would be a serious problem of an enterprise.
Another limitation of this concept is that money is expressed in terms of its values at the time a transaction is recorded in the accounts. But Subsequent changes in the purchasing power of money are not taken into account which discussed in this post which related to Principle of Accounting – Convention of Conservatism.
Cost Concept
This concept is another fundamental concept of accounting which closely related to the going concern concept. As per this concept: –
- An Assets ordinarily entered the accounting records at the price paid to acquire it for example it is cost and which is followed the “Convention of Conservatism.”
- This cost is the basis for all subsequent accounting for the assets.
The meaning of this concept is that the purchase of an asset is recorded in the books at the price actually paid for it irrespective of market value.
For example, if a business buys a building for Rs. 30,00,000 ‘the asset would be recorded in the books at Rs. 30,00,000 even though if its market value at that time Rs. 40,00,000.
But this concept does not mean that the asset will always be shown at cost. This cost becomes the basis for all future accounting for the asset which we already discussed in the Going Concern Concept. But It means that the asset value may be systematically be reduced by charging depreciation.
But the advantage of this concept is that it brings in objectivity in the preparations and presentation of financial statements which we already discussed in the Money Measurement Concept.
Now, that is all from my side. This post the first part of the Accounting Concept, and we will discuss in the next post which we will discuss 1- Dual aspect concept 2- Accounting period concept 3- Period matching of costs and revenues 4- Realization Concept.
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Nadeem Khan
M.Com, M.B.A.
Mail – ndmk1338@gmail.com