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Accounting Concepts and Conventions

The document outlines several key accounting concepts and conventions: The entity concept states that a business's transactions must be recorded separately from its owners or other businesses. The going concern concept assumes a business will continue operating. The periodicity concept divides a business's life into accounting periods for financial statements. The duality concept underlies double-entry accounting, where every transaction affects two accounts based on the accounting equation. The money measurement concept means only quantitative transactions are recorded. The accrual concept recognizes revenues and expenses in the period earned, regardless of cash flows. The matching principle matches revenues with related expenses in the same period. The historic cost concept values assets based on original cost. The prudence concept conservatively states assets and expenses and

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51 views

Accounting Concepts and Conventions

The document outlines several key accounting concepts and conventions: The entity concept states that a business's transactions must be recorded separately from its owners or other businesses. The going concern concept assumes a business will continue operating. The periodicity concept divides a business's life into accounting periods for financial statements. The duality concept underlies double-entry accounting, where every transaction affects two accounts based on the accounting equation. The money measurement concept means only quantitative transactions are recorded. The accrual concept recognizes revenues and expenses in the period earned, regardless of cash flows. The matching principle matches revenues with related expenses in the same period. The historic cost concept values assets based on original cost. The prudence concept conservatively states assets and expenses and

Uploaded by

Sam Sam
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Accounting Concepts and Conventions

Entity concept
The business entity concept (also known as separate entity and economic
entity concept) states that the transactions related to a business must be
recorded separately from those of its owners and any other business. In
other words, while recording transactions in a business, we take into
account only those events that affect that particular business; the events
that affect anyone else other than the business entity are not relevant and
are therefore not included in the accounting records of the business.

The going concern concept


The going concern concept of accounting implies that the business entity
will continue its operations in the future and will not liquidate or be
forced to discontinue operations due to any reason. A company is a
going concern if no evidence is available to believe that it will or will
have to cease its operations in foreseeable future.

Periodicity
The time period assumption (also known as periodicity assumption and
accounting time period concept) states that the life of a business can be
divided into equal time periods. These time periods are known as
accounting periods for which companies prepare their financial
statements to be used by various internal and external parties
Duality Concept
The dual aspect concept states that every business transaction
requires recordation in two different accounts. This concept is
the basis of double entry accounting, which is required by all
accounting frameworks in order to produce reliable financial
statements. The concept is derived from the accounting
equation, which states that:
Assets = Liabilities + Equity
The accounting equation is made visible in the balance sheet,
where the total amount of assets listed must equal the total of all
liabilities and equity. One part of most business transactions will
have an impact in some way on the balance sheet, so at least one
part of every transaction will involve assets, liabilities, or equity.

Money Measurement Concept


The money measurement concept states that a business should
only record an accounting transaction if it can be expressed in
terms of money. This means that the focus of accounting
transactions is on quantitative information, rather than on
qualitative information. Thus, a large number of items are never
reflected in a company's accounting records, which means that
they never appear in its financial statements.
Accrual Concept
An accrual is a journal entry that is used to recognize revenues
and expenses that have been earned or consumed, respectively,
and for which the related cash amounts have not yet been
received or paid out. Accruals are needed to ensure that all
revenues and expenses are recognized within the correct
reporting period, irrespective of the timing of the related cash
flows. Without accruals, the amount of revenue, expense, and
profit or loss in a period will not necessarily reflect the actual
level of economic activity within a business.
Accruals are a key part of the closing process used to create
financial statements under the accrual basis of accounting;
without accruals, financial statements are considerably less
accurate.
Under the double-entry bookkeeping system, an accrued
expense is offset by a liability, which appears in a line item in
the balance sheet. If accrued revenue is recorded, it is offset by
an asset, such as unbilled service fees, which also appears as a
line item in the balance sheet.
Matching principle
The matching principle requires that revenues and any related
expenses be recognized together in the same period. Thus, if
there is a cause-and-effect relationship between revenue and the
expenses, record them at the same time. If there is no such
relationship, then charge the cost to expense at once. This is one
of the most essential concepts in accrual basis accounting, since
it mandates that the entire effect of a transaction be recorded
within the same reporting period.
Historic Cost Concept
A historical cost is a measure of value used in accounting in
which the price of an asset on the balance sheet is based on its
nominal or original cost when acquired by the company
Prudence Concept
Under the prudence concept, do not overestimate the amount of
revenues recognized or underestimate the amount of expenses.
You should also be conservative in recording the amount of
assets, and not underestimate liabilities. The result should be
conservatively-stated financial statements.
Another way of looking at prudence is to only record a revenue
transaction or an asset when it is certain, and record an expense
transaction or liability when it is probable. Another aspect of the
prudence concept is that you would tend to delay recognition of
a revenue transaction or an asset until you are certain of it,
whereas you would tend to record expenses and liabilities at
once, as long as they are probable. Also, regularly review assets
to see if they have declined in value, and liabilities to see if they
have increased. In short, the tendency under the prudence
concept is to either not recognize profits or to at least delay their
recognition until the underlying transactions are more certain.

Objectivity

The objectivity principle is the concept that the financial


statements of an organization be based on solid evidence. The
intent behind this principle is to keep the management and the
accounting department of an entity from producing financial
statements that are slanted by the opinions and biases of the
company.

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