Basic Accounting Concepts

Assumptions are traditions and customs which are developed over a period of time and well-accepted by the profession. They provide a foundation for recording transactions and preparing financial statements. They are also referred to as ‘Accounting Concepts’ and form the basis of systematic accounting practices. The following are some important basic accounting concepts.

Basic accounting concepts

Money Measurement Concept

In accounting, all transactions are measured using a common unit of measurement, money. The Money Measurement Concept records only those transactions or events which can be measured or expressed in terms of money.

Entity Concept

The Business Entity Concept views the business as an entity, separate from its owners, i.e., business is assumed to have a distinct entity (existence) other than the existence of its proprietors.

Going – Concern Concept

The Going-Concern Concept records transactions on the assumption that a business will remain in operation long enough for all its current plans to be carried out.

Cost Concept

The Cost Concept is an accounting concept which is used only for fixed assets. The fixed asset are valued at their cost price, i.e., price paid at the time of acquisition.

Dual-Aspect Concept

Dual-Aspect involves debit and credit. For instance, when a business purchases goods for cash, it receives goods of some value and gives cash of equal value. Thus, every business transaction involves a dual or double aspect of equal value.

Periodicity Concept

The Periodicity Concept generates financial statements for relatively shorter periods such as a year or quarter, so that performance can be measured and compared.

Objective Evidence Concept

The Objective Evidence Concept means that all accounting entries should be evidenced and supported by business documents such as invoices, vouchers and so on.

Matching Concept

As per the Matching Concept, in an accounting period, the revenue that is reported must be set off against the expenses incurred to generate that revenue. This gives a true picture of the profit earned during that  period.

Realisation Concept

The Realisation Concept deals with how revenue is recognised by a business. Revenue is recognised when goods and services are delivered in quantities/amounts that are reasonable certain to be realised.

Legal Aspect Concept

The Legal Aspect Concept requires accounting records and statements to conform to legal requirements, i.e., accounting records should be maintained and statements should be prepared in the manner provided by law.

Accrual Concept

Accrual is a method of accounting that recognises revenue when earned rather than when due or collected, and expenses when incurred rather than when paid. Thus, transactions are recorded on the basis of income earned or expense incurred, irrespective of actual receipt or payment.

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