Accounting concepts and conventions provide the foundational rules and assumptions for preparing financial statements. Some key concepts include:
1) The business entity concept treats a business as separate from its owners.
2) Under the going concern concept, a business is assumed to operate indefinitely into the future.
3) Transactions must be measurable in monetary terms to be recorded.
4) Expenses must be matched to the revenues of the period to which they relate under the matching concept.
5) The accounting equation forms the basis of double-entry bookkeeping, where total assets equal the sum of owner's equity and liabilities.
Accounting concepts and conventions provide the foundational rules and assumptions for preparing financial statements. Some key concepts include:
1) The business entity concept treats a business as separate from its owners.
2) Under the going concern concept, a business is assumed to operate indefinitely into the future.
3) Transactions must be measurable in monetary terms to be recorded.
4) Expenses must be matched to the revenues of the period to which they relate under the matching concept.
5) The accounting equation forms the basis of double-entry bookkeeping, where total assets equal the sum of owner's equity and liabilities.
Accounting concepts and conventions provide the foundational rules and assumptions for preparing financial statements. Some key concepts include:
1) The business entity concept treats a business as separate from its owners.
2) Under the going concern concept, a business is assumed to operate indefinitely into the future.
3) Transactions must be measurable in monetary terms to be recorded.
4) Expenses must be matched to the revenues of the period to which they relate under the matching concept.
5) The accounting equation forms the basis of double-entry bookkeeping, where total assets equal the sum of owner's equity and liabilities.
Accounting concepts and conventions provide the foundational rules and assumptions for preparing financial statements. Some key concepts include:
1) The business entity concept treats a business as separate from its owners.
2) Under the going concern concept, a business is assumed to operate indefinitely into the future.
3) Transactions must be measurable in monetary terms to be recorded.
4) Expenses must be matched to the revenues of the period to which they relate under the matching concept.
5) The accounting equation forms the basis of double-entry bookkeeping, where total assets equal the sum of owner's equity and liabilities.
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What is Accounting Concept
Accounting concepts and convention are assumptions /postulates or
laid down rules of accounting that need to be followed in preparation of accounts and Financial Statements These are the theories on how and why certain categories of transactions should be treated in a particular manner Important types of Accounting concepts
1. Business Entity Concept-Business and its owners are two separate entities. Hence, business and owners can transact with each other. 2. Going Concern Concept- It is assumed that business will continue in foreseeable future.It is because of this concept we show prepaid expenses as an asset in books of accounts 3. Money Measurement Concept-Accounting records only those transactions which can be measured or expressed in terms of money .For eg Loyalty of employees can not be recorded in books of accounts 4. Accounting period-For measuring financial results, working life of business is split into short periods called accounting period. Normally it is 1 year i.e 1 st April to 31 st March 5. Historical Cost- Accounting is concerned with past events and it requires consistency and comparability that is why it requires the accounting transactions to be recorded at their historical costs and not the current values. This is called historical cost concept 6. Dual Aspect concept-Every transaction shall have two sided effects of same amount ( Debit and Credit) eg, Cash sales of Rs 2000 . Debit Cash Account Rs 2000 Credit Sales Account Rs 2000 7. Realisation concept- It tells that revenue is to be recognized only when the rewards and benefits associated with the items sold or service provided is transferred, where the amount can be estimated reliably and when the amount is recoverable. So revenue is recognised when earned ignoring when actual cash flows happens 8. Matching Concept- It requires that expenses incurred to earn the revenues recognised during the accounting period should be recognised in that time period and not in the next or previous period Eg.Salary paid in 2012-13 relating to 2011-12 is an expense for 2011-12 9. Conservatism Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is uncertainty about recording again, you should not record the gain.This concept makes sure that assets and income are not overstated and liabilities and expenses are not understated.
10. Materiality - Financial statements are prepared to help the users with their decisions. Hence, all such information which has the ability to affect the decisions of the users of financial statements is material and this property of information is called materiality.Materiality depends upon the nature or size of event. This concept is also helpful in deciding which items should appear as line items and which ones are aggregated with others 11. Accrual concept-Business transactions are recorded when they occur and not when the related payments are received or made. This concept is called accrual basis of accounting and it is fundamental to the usefulness of financial accounting information.
Accounting Equation It is the foundation of double entry system of accounting. The accounting equation displays that all assets are either financed by borrowed money or the owners money. Assets = Equities Asset is something of value that company owns Equities are the rights or claims over the asset. Equities are further divided into Owners equity/Capital Liability So accounting equation becomes Assets = Capital+Liability
