Accounting concept refers to the basic assumptions and rules and

principles which work as the basis of recording of business transactions

and preparing accounts.

The main objective is to maintain uniformity and consistency in accounting

records. These concepts constitute the very basis of accounting. All the
concepts have been developed over the years from experience and thus they
are universally accepted rules. Following are the various accounting
concepts that have been discussed in the following sections :

1 Business entity concept

2 Money measurement concept
3 Going concern concept
4Accounting period concept
5Accounting cost concept
6 Duality aspect concept
7.Realisation concept
8Accrual concept
9Matching concept

Business entity concept

This concept assumes that, for accounting purposes, the business enterprise
and its owners are two separate independent entities. Thus, the business and
personal transactions of its owner are separate. For example, when the
owner invests money in the business, it is recorded as 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 business
expense. Thus, the accounting records are made in the books of accounts
from the point of view of the business unit and not the person owning the
business. This concept is the very basis of accounting.

Significance
The following points highlight the significance of business entity concept :
l This concept helps in ascertaining the profit of the business as only the
business expenses and revenues are recorded and all the private and
personal expenses are ignored.
l This concept restraints accountants from recording of owner’s private/
personal transactions.
l It also facilitates the recording and reporting of business transactions
from the business point of view
l It is the very basis of accounting concepts, conventions and principles.
2.2 MONEY MEASUREMENT CONCEPT
This concept assumes that all business transactions must be in terms of
money, that is in the currency of a country. In our country such transactions
are in terms of rupees.
Thus, as per the money measurement concept, transactions which can be
expressed in terms of money are recorded in the books of accounts.

Significance
The following points highlight the significance of money measurement
Concept:

l This concept guides accountants what to record and what not to record.
l It helps in recording business transactions uniformly.
l If all the business transactions are expressed in monetary terms, it will
be easy to understand the accounts prepared by the business enterprise.
l It facilitates comparison of business performance of two different
periods of the same firm or of the two different firms for the same
period.

2.3 GOING CONCERN CONCEPT

This concept states that a business firm will continue to carry on its activities
for an indefinite period of time. Simply stated, it means that every business
entity has continuity of life. Thus, it will not be dissolved in the near future.
This is an important assumption of accounting, as it provides a basis for
showing the value of assets in the balance sheet;

Significance
The following points highlight the significance of going concern concept;
l This concept facilitates preparation of financial statements.
l On the basis of this concept, depreciation is charged on the fixed asset.
l It is of great help to the investors, because, it assures them that they
will continue to get income on their investments.
l In the absence of this concept, the cost of a fixed asset will be treated
as an expense in the year of its purchase.
l A business is judged for its capacity to earn profits in future.

2.4 ACCOUNTING PERIOD CONCEPT

All the transactions are recorded in the books of accounts on the assumption
that profits on these transactions are to be ascertained for a specified period.
This is known as accounting period concept. Thus, this concept requires
that a balance sheet and profit and loss account should be prepared at regular
intervals. This is necessary for different purposes like, calculation of profit,
ascertaining financical position, tax computation etc.
Further, this concept assumes that, indefinite life of business is divided into
parts. These parts are known as Accounting Period. It may be of one year,
six months, three months, one month, etc. But usually one year is taken as
one accounting period which may be a calender year or a financial year.
Significance
l It helps in predicting the future prospects of the business.
l It helps in calculating tax on business income calculated for a particular
time period.
l It also helps banks, financial institutions, creditors, etc to assess and
analyse the performance of business for a particular period.
l It also helps the business firms to distribute their income at regular
intervals as dividends.

2.5 ACCOUNTING COST CONCEPT

Accounting cost concept states that all assets are recorded in the books of
accounts at their purchase price, which includes cost of acquisition,
transportation and installation and not at its market price. It means that fixed
assets like building, plant and machinery, furniture, etc are recorded in the
books of accounts at a price paid for them.

Significance
l This concept requires asset to be shown at the price it has been acquired,
which can be verified from the supporting documents.
l It helps in calculating depreciation on fixed assets.
l The effect of cost concept is that if the business entity does not pay
anything for an asset, this item will not be shown in the books of
accounts.

2.6 DUAL ASPECT CONCEPT

Dual aspect is the foundation or basic principle of accounting. It provides
the very basis of recording business transactions in the books of accounts.
This concept assumes that every transaction has a dual effect, i.e. it affects
two accounts in their respective opposite sides. Therefore, the transaction
should be recorded at two places. It means, both the aspects of the
transaction must be recorded in the books of accounts. For example, goods
purchased for cash has two aspects which are (i) Giving of cash
(ii) Receiving of goods. These two aspects are to be recorded.
Thus, the duality concept is commonly expressed in terms of fundamental
accounting equation :
Assets = Liabilities + Capital
The above accounting equation states that the assets of a business are always
equal to the claims of owner/owners and the outsiders. This claim is also
termed as capital or owners equity and that of outsiders, as liabilities or
creditors’ equity.
The knowledge of dual aspect helps in identifying the two aspects of a
transaction which helps in applying the rules of recording the transactions
in books of accounts. The implication of dual aspect concept is that every
transaction has an equal impact on assets and liabilities in such a way that
total assets are always equal to total liabilities.
Significance
l This concept helps accountant in detecting error.
l It encourages the accountant to post each entry in opposite sides of two
affected accounts.

2.7 REALISATION CONCEPT

This concept states that revenue from any business transaction should be
included in the accounting records only when it is realised. The term
realisation means creation of legal right to receive money. Selling goods
is realisation, receiving order is not.

Significance
l It helps in making the accounting information more objective.
l It provides that the transactions should be recorded only when goods
are delivered to the buyer.

2.8 ACCRUAL CONCEPT

The meaning of accrual is something that becomes due especially an amount
of money that is yet to be paid or received at the end of the accounting
period. It means that revenues are recognised when they become receivable.
Though cash is received or not received and the expenses are recognised
when they become payable though cash is paid or not paid. Both transactions
will be recorded in the accounting period to which they relate. Therefore,
the accrual concept makes a distinction between the accrual receipt of cash
and the right to receive cash as regards revenue and actual payment of cash
and obligation to pay cash as regards expenses.

Significance
l It helps in knowing actual expenses and actual income during a
particular time period.
l It helps in calculating the net profit of the business.

2.9 MATCHING CONCEPT

The matching concept states that the revenue and the expenses incurred to
earn the revenues must belong to the same accounting period. So once the
revenue is realised, the next step is to allocate it to the relevant accounting
period. This can be done with the help of accrual concept.

Significance
l It guides how the expenses should be matched with revenue for
determining exact profit or loss for a particular period.
l It is very helpful for the investors/shareholders to know the exact
amount of profit or loss of the business.