Accounting concepts, Financial Accounting

Accounting concepts

The word 'Accounting Concept' is used to denote necessary assumptions and ideas which are basic to accounting practice. The variety of accounting concepts is like this:

  • Business Entity concept: For accounting reason, the owner of an enterprise is constantly considered to be separate and distinct from the business which he/she controls
  • Dual aspect concept: each business transaction engage two aspects - a receipt and a payment. That is, each debit has an equal and corresponding credit. The dual facet idea is expressed as: Capital + Liabilities = Assets. This is identified as 'the accounting equation'.
  • Going concern concept: Under this statement, the enterprise is usually viewed as a going concern. It is unspecified that the enterprise has neither the intention nor the necessity of liquidation of curtailing materially the level of its operations. That is why possessions are valued on the source of going concern concept and are depreciated on the basis of expected life sooner than on the basis of market value.
  • Accounting period concept: 'Accounting year' is the era of 12 months for which accounts are to be equipped under the Companies Act and Banking Regulation Act.
  • Money measurement concept: In accounting, each event or transaction which can be articulated in terms of money is recorded in the books of accounts.

This idea does not trace any fact or happening, however significant it is to the business, in the books of accounts if it cannot be spoken in terms of money. And as per this idea, a transaction is recorded at its money worth on the date of occurrence and the following changes in the money value are suitably unnoticed.

  • Historical Cost concept: The fundamental idea of cost concept is - i) asset is recorded at the price paid to obtain it, that is, at cost and ii) this cost is the base for all following accounting for the asset. Fixed assets are exposed in the books of accounts at cost less depreciation. Current assets are from time to time valued at cost price or market price, either is less.
  • Revenue recognition concept: In accounting, 'revenue' is the gross inflow of cash, receivables or other reflections arising in the track of an enterprise from the sale of goods, from the representation of services and from the holding of possessions. In the case of profits, the key question is at what stage the transaction should be recorded and recognized.
  • Periodic matching of cost and revenue concept : After the revenue appreciation, all costs incurred in earning that revenue should be charged beside that revenue in order to establish the net income of the business.
  • Verifiable objective evidence concept: as said by this idea, all accounting have to be based on objective proof. i.e., the transactions should be supported by confirmable documents.
  • Accrual concept: beneath this idea, revenue recognition and costs for the applicable period depend on their realization and not on definite receipt or payment. In relation to revenue, the accounts should keep out amounts relating to subsequent period and offer for revenue recognized, but not received in cash. likewise, in relation to costs, offer for costs incurred but not paid and prohibit costs paid for succeeding period.
Posted Date: 10/15/2012 5:15:09 AM | Location : United States

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