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2. Business Entity Concept

This concept assumes that the organization and business owners are two independent entities. Hence,
the business translation and personal transaction of its owner are different. For example, when the
business owner invests his money in the business, it is recorded as a liability of the business to the
owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it
is not treated as a business expense. Thus, the accounting transactions are recorded in the books of
accounts from the organization's point of view and not the person owning the business

Accrual Concept

expenses are recognized when they become payable whether cash is paid or not. Therefore, both the
transactions are recorded in the accounting period in which they relate. revenue is recognized when
realized and expenses are recognized when they become due and payable irrespective of the cash
receipt or cash payment

Accounting Cost Concept

all the business assets should be written down in the book of accounts at the price assets are
purchased, including the cost of acquisition, and installation. The assets are not recorded at their market
price. It implies that the fixed assets like plant and machinery, building, furniture, etc are recorded at
their purchase price. This cost is also termed as historical cost.

3.Dual Aspect

implies that the transaction that is recorded affects two accounts on their respective opposite sides.
Hence, the transaction should be recorded at dual places. It implies that both aspects of the transaction
should be recorded in the books of account.

Assets = Liabilities + Capital

The Going concept in accounting states that business activities will be carried out by any firm for
an unlimited duration it will not be dissolved shortly.

Eg., Depreciation

1 . Accounting period concept\

a period during which business enterprises are required to prepare financial statement at specified
intervals.

accounting period concepts state that all the transactions recorded in the books of account should
be based on the assumption that profit on these transactions is to be ascertained for a specific
period. Hence this concept says that the balance sheet and profit and loss account of a business
should be prepared at regular intervals. This is important for different purposes like calculation of
profit and loss, tax calculation, ascertaining financial position, etc. Also, this concept assumes that
business indefinite life is divided into two parts. These parts are termed accounting periods. It can be
one month, three months, six months, etc. Usually, one year is considered as one accounting period
which may be a calendar year or financial year. The year that begins on January 1 and ends on
January 31 is termed as calendar year whereas the year that begins on April 1 and ends on March
31 is termed as financial year.

The term realization concept states that revenue earned from any business transaction should
be included in the accounting records only when it is realized. The term realization implies the
creation of a legal right to receive money. Hence, it should be noted that selling goods is considered
as realization whereas receiving order is not considered as realization.In other words, the revenue
concept states that revenue is realized when cash is received or the right to receive cash on the sale
of goods or services or both have been created.

The Matching concept states that revenue and expenses incurred to earn the revenue must
belong to the same accounting period.

if you pay a commission to a salesperson for the sale that you record in March. The commission
should also be recorded in the same month.

Conservatism:
Consistency: A company is forced to apply similar accounting principles across
different accounting cycles. Once this chooses a method it is urged to stick with it
in the future also, unless it finds a good reason to perform it in another way. In the
absence of these accounting conventions, the ability of investors to compare and
assess how the company performs becomes more challenging.
Full Disclosure: Information that is considered potentially significant and relevant
is to be completely disclosed, regardless of whether it is detrimental to the
company. Related party transactions
Materiality: Similar to full disclosure, this convention also bound organizations to
put down their cards on the table, meaning they need to totally disclose all the
material facts about the company. The aim behind this materiality convention is
that any information that could influence the person’s decision by considering the
financial statement must be included.
Accounting Principle
Accrual Principle

Consistency Principle

Conservatism Principle

Going Concern Principle

Matching Principle

Full Disclosure Principle

Conservatism is the convention by which, when two values of a

transaction are available, the lower-value transaction is recorded. By
this convention, profit should never be overestimated, and there
should always be a provision for losses.

Consistency prescribes the use of the same accounting principles

from one period of an accounting cycle to the next, so that the same
standards are applied to calculate profit and loss.

Materiality means that all material facts should be recorded in

accounting. Accountants should record important data and leave out
insignificant information.

Full disclosure entails the revelation of all information, both

favourable and detrimental to a business enterprise, and which are of
material value to creditors and debtors.
Accounting principles are the rules and guidelines that companies and other
bodies must follow when reporting financial data.

#1 – Accrual principle:
The company should record accounting transactions in the
same
period it happens, not when the cash flow was earned. For
example, let’s say that a company has sold products on
credit. As per the accrual principle, the sales should be
recorded during the period, not when the money would be
collected.
#2 – Consistency principle:
If a company follows an accounting principle, it should keep
following the same principle until a better one is found. If the
consistency principle is not followed, the company will jump
around here and there, and financial reporting will be
messy. As a result, it would be difficult for investors to see
where the company has been going and how it is
approaching its long-term financial growth.
#3 – Conservatism principle:
As per the conservatism principle, accounting faces two
alternatives – one, report a more significant amount, or two,
report a lesser amount. To understand this in detail, let’s take
an example. Let’s say that Company A has reported that it
has machinery worth $60,000 as its cost. Now, as the market
changes, the selling value of this machinery comes down to
$50,000. Now the accountant has to choose one from two
choices – first, ignore the loss the company may incur on
selling the machinery before it’s sold; second, report the loss
on machinery immediately. As per the conservatism principle,
the accountant should go with the former choice, i.e., to
report the loss of machinery even before the loss would
happen. Conservatism principle encourages the
 accountant to report more significant liability amount, lesser
asset amount, and also a lower amount of net profits.
#4 – Going concern principle:
As per the going concern principle, a company would operate
for as long as it can in the near or foreseeable future.
Therefore, by following the going concern principle, a
company may defer its depreciation or similar expenses for
the next period.
#5 – Matching principle:
The matching principle is the basis of the accrual principle we
have seen before. As per the matching principle, it’s said that
if a company recognizes and records revenue, it should also
record all costs and expenses related to it. So, for example, if
a company records its sales or revenues, it should also record
the cost of goods sold and also other operating expenses.
#6 – Full disclosure principle:
As per this principle, a company should disclose all financial
information to help the readers see the company
transparently. Without the full disclosure principle, the
investors may misread the financial statements because they
may not have all the information available to make a sound
judgment.

SBI Bank exercises caution when recording revenues and gains, recognizing
them only when they are reasonably certain. On the other hand, expenses
and losses are recognized as soon as they are probable.

 Income Statement (Profit and Loss Account): Here, revenue recognition

principles, accruals, prudence, and the going concern concept are applied.
 Balance Sheet (Statement of Financial Position): The dual aspect,
entity concept, historical cost, and money measurement concepts are used
for recording assets, liabilities, and equity.
 Cash Flow Statement: The accrual basis and cash accounting principles
are employed to present cash flows from operating, investing, and financing
activities.
 Notes to the Financial Statements: Full disclosure is applied to provide
additional information about various items in the financial statements.

conservatism dictates that a company should anticipate and account for potential
losses or liabilities even if they are uncertain or not yet realized. This approach aims
to avoid overestimating assets or understating liabilities, which could lead to a more
accurate and reliable representation of the company's financial position.
Conservatism also plays a role in other areas of accounting, such as inventory
valuation, depreciation of assets, and recognition of contingent liabilities. Overall,
it's about erring on the side of caution