Accounting Concepts - Meaning – Explanation

Accounting Concepts are those fundamental basic and generally accepted rules which are used while preparing the financial statements. Accounting Concepts are parts of Accounting Principles And Generally Accepted Accounting Principles (GAAP).

Following are the most important accounting concepts of Accounting:

1.   Business Entity / Separate Entity Concept

A business entity is an independent entity and which is separated from the owners. All the Transactions are recorded from the point of view of the business. The business entity has its own assets and liabilities. Personal transactions of owner are not taken into account and are not recorded in the books of accounts of the business. Only those transactions of the owners are recorded that affect the financial position of the business.

For Examples in case of transactions for Capital and Drawings, these transactions are recorded in the books of business.

2.   Going Concern Concept

Going Concern Concept implies that the business does not have any intention to close down the business in near future so the assets and liabilities are not shown at market value.

For Example, the company charges the Depreciation on equipment by the applicable method and are not considering the windup of the assets.

3.   Money Measurement Concept

According to this concept, only those transactions are recorded which are expressed in terms of money.  

For example, Sold goods for Cash Rs.90,000 is an event so it is a transaction but order for the supply of goods to seller is not an event in Accounting as it is not expressed in terms of money so it is not a transaction.

4.   Cost Concept

According to this concept, an asset is recorded at its historical cost, which we get at the time of purchase of the asset, and this cost becomes the basis for value of the asset. However,  the cost concept  does not mean that the book value of the asset can not be shown.

For Example, we purchase Plant & Machinery for Rs.80,000 then this cost is the historical cost of the asset and this asset is recorded at cost in the balance sheet.

5.   Dual Aspect Concept

Dual aspect means every transactions having two fundamental aspect one involving the receiving of the benefit and others to give the benefit to others. For every debit, there is a credit with an equal amount.

For Example, Mr. A purchase goods for Rs.30,000 have two fundamental aspects. One is that the goods are come into the business and second one is that the cash is going out of the business. But, both debit and credit remain equal throughout the accounting period.

6.   Accounting Period Concept

According to this concept, financial statements of the business are prepared during a particular period and at the end of accounting period, financial performance and financial position of the business are determined.

Some Businesses prepare financial statements monthly, some quarterly, some semi-annually and usually many businesses prepare financial statements annually.

7.   Matching Concept

Matching Concept argues that all those expenses that are incurred during a particular period of time to generate revenue must be set off against that revenue, otherwise, true financial position of the business can not be drawn.

For Example, Salaries paid to employees are expenses for the business for generating the revenue for the business. If the business does not pay the salaries to employees in accounting year 2014, even though, the employees generate the revenue for the business in 2014, so these expenses should be set off against the revenue of 2014 only, even though, the business pay salaries to them in 2015.

8.   Realization Concept

According to this Concept, Sales is recognized and recorded at the point of time when the buyer becomes the owner of the goods sold and legally liable to pay the bill.

For Example, Mr. A places and order for the supply of goods to Mr. B (Supplier).  Mr. B sends goods to Mr. B, 10 days after the receipt of this order and Mr. A makes payments to Mr. B, 5 days after receiving the delivery of goods. In this case, we recognize revenue at the time when Mr. B delivered the goods to Mr. A, i.e, before the delivery. We neither record the revenue at the time when he / she has received the order for the supply of goods nor at the time when he / she makes payments to his / her supplier (Mr. B).