Basic Accounting Concepts or Basic Accounting Principles:

Assignment – 6
1. Business Entity Concept or Accounting Entity Concept or Separate Entity Concept :
● According to Business Entity Concept, business is treated as an entity which is separate and distinct from
its owners.
● Business unit will have a completely separate set of books and the business transactions are recorded in
these books from the business point of view not the owner’s point of view.
● The proprietor (owner) is treated as the creditor of the business to the extent of the capital invested by
him in the business.
● The capital is treated as a liability of the business. The interest on capital is treated as an expense of the
business.

2. Money Measurement Concept:

● According to Money Measurement Concept, only those transactions are recorded in the books of
accounts which can be measured in terms of money. For example Purchase of goods, payment of salaries
etc.
● The events like a) The appointment of a top level manager b) The quarrel between two managers, are not
recorded in the books of accounts because these cannot be measured in terms of money.
● The record of transactions is not kept in physical units like, 2 acres of land; 10 computers etc. The record
of transactions is kept in monetary unit like, land worth Rs.10,00,000; Computers Rs.50,000 etc.

3. Going Concern Concept:

As per Going Concern Concept it is assumed that the business will continue to exist for a long period in the future.
The transactions are recorded in the books of the business on the assumption that it is a continuing enterprise.
● Because of this concept, the outside parties give long term loans and purchase shares and debentures of
the business.
● Because of this concept, the assets are classified as fixed and current assets and the liabilities are classified
as long term and short term liabilities.

4. Accounting Period Concept:

● The entire life of the enterprise is broken into smaller periods, usually 12 months, which is termed as the
‘Accounting Period’.
● At the end of every accounting period financial statements are prepared to know the profit or loss of the
business and the financial position of the business.
● According to the Income Tax Law, the financial year of a business should begin on 1st April and end on 31st
March of the following year.

5. Cost Concept or Historical Cost Concept:

● According to Cost Concept, an asset is recorded in the books of accounts at the price at which it was
acquired.
● For example if a business entity purchases a building for Rs.20,00,000, it would be recorded in the books
at this figure. The increase or decrease in the market value of the asset would not be recorded in the
books of accounts.
● However, the cost concept does not mean that assets will be continuously shown at their purchased price
every year. The cost is systematically reduced from year to year by charging depreciation and the assets
are shown in the balance sheet at the value after subtracting the depreciation.
6. Dual Aspect Concept:
● Dual Aspect Concept states that every business transaction has two aspects, one debit and one credit of
same amount.
● In other words, every transaction affects at least two accounts. One account is debited and the other
account is credited.
● The system of recording transactions based on Dual Aspect Concept is called Double Entry System.

● It is because of this concept that the two sides of the balance sheet are always equal.

● The Dual Aspect Principle is commonly expressed in terms of fundamental Accounting Equation, which is
as follows: Assets = Liabilities + Capital

7. Revenue Recognition Concept or Realisation Concept:

● Revenue means the amount earned by business, by sale of goods or by providing a service.

● According to Revenue Recognition Concept, revenue is recognised when the goods have been transferred
to the purchaser, whether the amount is received or not.
● For this reason, credit sales are treated as revenue on the day of sales, not when money is received from
the purchaser.
● For example, if a firm sold goods on 10th March, 2023 and received the cash on 5th April, 2023. In this case
the sale of goods is treated as revenue on 10th March, 2023 not on 5th April, 2023.
● This is treated as the revenue for the financial year ending 31st March, 2023 not for the financial year
beginning with 1st April, 2023.

8. Matching Concept:
● To find the profit or loss for a particular period, the expenses of that period are deducted from the
revenues earned during that period.
● Matching Concept states that expenses incurred in an accounting period should be matched with
revenues earned during that period.
● For example: A company sells 1000 units in a financial year. According to matching concept the cost of
producing 1000 units should be recorded as an expense. Here the expense is matched with the revenue.

9. Full Disclosure Concept:

● According to Full Disclosure Concept, all significant information relating to the economic affairs of the
enterprise should be completely disclosed.
● Various items or facts which do not find place in accounting statements are shown in the Balance Sheet by
way of footnotes, such as contingent liabilities, change in methods etc.
● Disclosing of facts does not mean leaking out the secrets of the business but disclosing sufficient
information which is of material interest to the users of the financial statements.

10. Consistency Concept:

● This concept states that accounting principles and methods once selected and adopted, should be applied
consistently year after year.
● It helps in better understanding of accounting information and also allows the comparison of the
information with previous years’ information.
● For example, there are two methods of charging depreciation, Written Down Value Method and Straight
Line Method. According to this concept, the method once chosen and applied should be applied
consistently year after year to make the financial statements comparable.
11. Prudence Concept or Conservatism Concept:
● Conservatism Concept states that “Do not anticipate a profit, but provide for all possible losses”.

● According to this concept, all anticipated losses should be recorded in the books of accounts, but all
anticipated or unrealized gains should be ignored until they are actually realised.
● This concept ensures that the financial statements do not paint a better picture than what is actually is.
For example,
i. Closing stock is valued at cost price or market value whichever is less.
ii. Provision for doubtful debts is created in anticipation of actual baddebts.

12. Materiality Concept:

● According to this concept, items having an insignificant effect need not be disclosed in the financial
statements.
● These insignificant items are usually merged with other items. For example, purchase of pens, writing
pads etc. are not shown separately. They are shown under one heading named “Stationery”.
● It should be noted that what is material for one business may be immaterial for another. For example, the
cost of small tools may be material for a small repair workshop, but the same figure may be immaterial
for a big business.

13. Objectivity Concept or Verifiable Objective Concept:

● Objectivity Concept states that each transaction should be supported by verifiable documents and
vouchers such as cash memos, invoices, sales bill, pay-in-slips, agreements etc.
● For example, when the goods are purchased for cash, the transaction must be supported by cash receipt
and if the goods are purchased on credit, the transaction must be supported by a copy of invoice.
● The cash receipt or invoice become the documentary evidence of the transaction and provide an objective
basis for verifying the transaction.