20/8/2020 Theory Base of Accounting

In order to maintain uniformity and consistency in accounting records certain rules or

principles have been developed which are regularly accepted by the accounting
profession. These rules are called by different names such as principles, conventions
concepts and assumptions..
Thus, Generally Accepted Accounting Principles (GAAP) refer to a set of rules or
guidelines adopted for recording and reporting of business transactions in order to
bring uniformity in the preparation and presentation of financial statements.
the following are the most important concepts:
1. Business entity concept/Assumption
Business entity concept states that the business has a distinct and separate entity
from its owners .It means that for the purpose of accounting the business and its
owner are to be treated as two separate entities .
The accounting records are made in the books of accounts from the point of view of
the business unit and not that of the owner .The personal Assets and liabilities of the
owner are, therefore, not considered while recording and reporting the Assets and
liabilities of the business.
2. Money Measurement Concept
The concept of Money Measurement states that only those transactions and
happenings in an organisation which can be expressed in terms of money such as sale
of goods, purchase of goods ,etc are to be recorded in the books of accounts.
All transactions or happenings which cannot be expressed in terms of money for
example, the appointment of a manager, the creativity of its research department ,do
not find a place in accounting records of the firm .
3. Going concern concept
Going concern concept assumes that the business firm would continue to carry out its
operation indefinitely, that is ,for a fairly long period of time and would not be liquidated
in the foreseeable future .This assumption of accounting provides a basis for showing
the value of assets in the Balance Sheet .
4. Accounting period assumption
Accounting period assumption refers to the span of time at the end of which the
financial statements of an enterprise are prepared to know whether it has earned
profits or incurred losses during that period and what exactly is the position of its
Assets and liabilities at end of that period.
The financial statements are prepared at regular intervals on the basis of such
information. This interval of time is called the accounting period.
5. Cost concept / Historical cost concept
This concept requires that all assets are recorded in the books of accounts at their
purchase price which includes the cost of acquisition, transportation, installation and
making the assets ready-to-use.
The market value of the Asset will not be taken.
6.Dual aspect concept
This concept states that every transaction has a dual or two fold effect and should,
therefore ,be recorded at two places example:
Started business with cash and invested money e in the business
 The 2-fold aspects are cash and capital
Assets= Liabilities + Capital ,( A = L+ C)
7.Matching concept
matching concept states that the expenses incurred in accounting period should be
matched with the revenue during that period.
Revenue and expenses incurred to earn the revenues must belong to the same
accounting period. It implies that all revenue earned during an accounting year
whether received during that year or not and all cost incurred whether paid during the
year or not should be taken into account for finding out the profit or loss for that year.
8.Full disclosure concept
This principle requires that all the material and relevant facts concerning the financial
performance of an enterprise must be fully and completely disclosed in the financial
statements and their accompanied footnotes. This is to enable the users to make
corrections as an assessment about the financial soundness of the enterprise and
profitability and helps them to make important decisions.
9.Consistency concept
The information provided by financial statements would be useful in drawing
conclusions regarding the working of an enterprise only when it allows comparison
both inter firm and intra period . This can be possible only when the accounting
practices followed by an enterprise are uniform and consistent over the period of time .
Consistency does not prohibit changes in accounting policies and practices. Required
changes should be fully disclosed indicating their probable effects on the financial
results of the business
10.Verifiable objectivity concept:
The concept of objectivity requires that accounting transactions should be recorded in
an objective manner free from bias of Accountants and others. This is possible when
every of the transaction in the books of accounts are supported by verifiable
documents known as vouchers.