The document discusses key accounting concepts:
1. Ten basic accounting concepts are described, including the business entity, money measurement, going concern, accounting period, historical cost, double entry, revenue recognition, matching, full disclosure, and consistency concepts.
2. The business entity concept states that a business has a separate existence from its owners and transactions are recorded from the business's perspective rather than the owners'.
3. Under the money measurement concept, only transactions involving money are recorded in accounting books to provide meaningful financial information.
The document discusses key accounting concepts:
1. Ten basic accounting concepts are described, including the business entity, money measurement, going concern, accounting period, historical cost, double entry, revenue recognition, matching, full disclosure, and consistency concepts.
2. The business entity concept states that a business has a separate existence from its owners and transactions are recorded from the business's perspective rather than the owners'.
3. Under the money measurement concept, only transactions involving money are recorded in accounting books to provide meaningful financial information.
The document discusses key accounting concepts:
1. Ten basic accounting concepts are described, including the business entity, money measurement, going concern, accounting period, historical cost, double entry, revenue recognition, matching, full disclosure, and consistency concepts.
2. The business entity concept states that a business has a separate existence from its owners and transactions are recorded from the business's perspective rather than the owners'.
3. Under the money measurement concept, only transactions involving money are recorded in accounting books to provide meaningful financial information.
The document discusses key accounting concepts:
1. Ten basic accounting concepts are described, including the business entity, money measurement, going concern, accounting period, historical cost, double entry, revenue recognition, matching, full disclosure, and consistency concepts.
2. The business entity concept states that a business has a separate existence from its owners and transactions are recorded from the business's perspective rather than the owners'.
3. Under the money measurement concept, only transactions involving money are recorded in accounting books to provide meaningful financial information.
The various concepts of accounting are as follows:-
1. Business entity concept This concept states that the business has a separate existence from businessman. It means transactions are recorded from firm's point of view and never from view point of proprietors. Thus, the transactions are recorded in the books of shop, factory, firm or company and never in the books of partners, shareholders and businessman. At the time of decision making regarding asset, liability, expense business view point is taken into consideration.
2. Money measurement concept
According to this concept, we record only those business transactions which are in terms of money. This makes the information more meaningful. For example A statement showing that business was started with ` 10,000/- cash and 50 meters of cloth is meaningless and fails to tell us the capital of business. If the value of 50 meters cloth is estimated to be ` 5,000/- we can say that business was started with ` 10,000 + 5,000 = ` 15,000 which will be meaningful.
3. Going concern concept
At the time of recording business transactions it is assumed that business is carried on indefinitely. That is why, fixed assets (land and building, plant and machinery) are purchased and not hired. Thus, accountants have to treat business activity as a continuous process and record transactions accordingly.
4. Accounting period concept
According to Companies Act, 2013 and Banking Regulation Act, 1949 accounting period should consist of 12 months only which is regarded as an ideal and convenient period of accounting. It
26 [Chapter 3 → Basic Accounting Concepts] 27
should never exceed 12 months. In case of companies, accounting year must be a financial year i.e. 1st April to 31st March of the next year.
5. Historical cost concept
As per this concept, all business transactions are recorded in the books of accounts at their cost of purchase. It is called historical cost concept because the balance of assets and liabilities are carried forward from year to year at its purchased cost, irrespective of increase or decrease in the market value of assets.
6. Double entry concept or duality
Every business transaction has a double effect - debit and credit. These are the two sides of every business transaction. For example Loan from bank of ` 3,00,000/- will be treated as a liability because it will be paid in future but it is also an asset because we are receiving cash in the form of loan .
7. Revenue recognition concept
Revenue is the amount received from the sale of goods or services rendered. Thus, revenue will be considered to have been realized when the transaction has been completed and the amount has been received. For example X sells the goods to Y in January 2011 and received the amount for it in March 2010. In this case, revenue will be recognized in March 2010.
8. Matching concept According to this concept, income can be determined by matching sales of a business with its costs. Thus, gross profit can be determined by deducting cost of goods sold from sales revenue. Net profit is determined after deducting selling and distribution expenses from gross profit.
9. Full disclosure concept
Accounting information must be disclosed fully without any errors, biasness and mistakes. This should be done with the sincere efforts of accountant after considering accounting assumptions. Information should be presented in such a manner that it fulfills the needs of various internal and external users of accounting and capable of changing the results of business.
10. Consistency According to this convention, the accounting policies, concepts and principals should be applied consistently over a period of time. For example: If the depreciation has been charged according to straight line method for part of the year the same method should be used for the remaining part of the year. Similarly, the method of valuation of inventories and fixed assets should be followed consistently.
11. Materiality 28 Fundamentals of Accounting
Materiality means the information which has changed the results of business should be properly disclosed. Information which is not very important should be avoided and certain important information should be disclosed properly. It does not mean leaking business secrets. It influences the decision making of users. 12. Conservatism According to this concept, the business adopts a very safe policy. Thus, it accounts for all probable losses but does not considers probable profits. For example Valuation of stocks is made at cost price or market price whichever is lower. Similarly we keep on reducing the value of land and building by way of depreciation though their may be an increase in its value. The main purpose of this concept is to ensure that business transactions are recorded in such a manner that profit should not be over stated.
13. Objectivity This concepts states that every business record must be based and supported by documentary evidence. The accountant should not pass any entry in the books of accounts for which vouchers are not available. The vouchers or documentary evidence should mention the amount of payment, date of payment, person to whom payment is made, the officer authorizing payment and cancellation of voucher so that double payment on the same voucher cannot be made. The concept of objectivity is that accounting should be free from manipulation.
Test your understanding
Q1. State whether the following statements are true or false.
1. In accounting all business transactions are recorded on double entry basis. 2. Dual aspect concept is also called accounting equivalence concept. 3. Fixed assets are those assets which are held for a long period of time. 4. Capital expenditure is the expenditure which is incurred for obtaining benefit within one year. 5. Fixed liabilities are those liabilities which can be paid within one year. Answer: 1. True 2. True 3. True 4. False 5. False
Q2. Fill in the blanks:
1. ________ represents owners equity in business. 2. ________ expenditure can be utilized within one year. 3. ________ profit is the excess of selling price over cost of goods sold. [Chapter 3 → Basic Accounting Concepts] 29
4. ________ profit is the net income of the business.
5. ________ capital is invested in fixed assets. Answer: 1. Capital 2. Revenue 3. Gross 4. Net 5. Fixed
Q3. Choose the correct answer:
1. According to money measurement concept, the following will not be recorded in the books of accounts: a. Value of furniture b. Sale of goods c. Quality of services d. None of these 2. According to business entity concept, the money brought into business by the proprietor is credited to: a. Capital account b. Business account c. Drawings account d. Purchases account 3. The same accounting principles and methods should be followed from year to year. This is a concept of: a. Consistency b. Materiality c. Full disclosure concept d. Matching concept 4. Once a business is started it is assumed that it will be continued for a long period of time: a. Going concern concept b. Revenue recognition concept c. Accounting period concept d. Matching concept Answer: 1. c 2. a 3. a 4. a
Essay type Questions
Q1. Explain the difference between:
a. Current assets and fixed assets 30 Fundamentals of Accounting
b. Trade discount and cash discount
c. Current liabilities and fixed liabilities d. Working capital and fixed capital
Q2. Write short notes on:
a. Materiality concept b. Conservatism c. Matching concept
