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ACCOUNTING CONCEPTS

Accountants adopt the following concepts in recording the business transactions:

(i)                   Separate Entity Concept. According to this concept, the firm is separated from the owner of the business whenever the firm is born. Then it is necessary to record the business transactions separately to distinguish it from the owner’s personal transactions.

(ii)                 Going Concern Concept. In this concept, it is assumed that transactions are recorded hoping that the business concern is to exist even in the future. A firm is said to be a going concern when there is neither the intention nor the necessity to wind up its operations.

(iii)                Money Measurement Concept. Measurement of business event in terms of money helps in understanding the state of affairs of the business in a better way. In accounting, all transactions are expressed and interpreted in terms of money. Accounting records only those transactions which are being expressed in monetary terms though quantitative records are also kept.

(iv)                Cost Concept. According to this concept

(a) an asset is ordinarily entered in the accounting records as the price paid to acquire it and

(b) this cost is the basis for all subsequent accounting for the asset.

(v)                 Dual Aspect Concept. This is the basic concept of accounting. According to this concept every business transaction has two aspects. (a) Debit,  (b) Credit. If a firm has acquired an asset, it must have resulted in one of the following:

(a) The owner of the firm has contributed money for the acquisition of the asset.

(b) For the consideration of asset acquired, some other asset has been given up.

The reverse is also true. For example, A starts business with capital of Rs.20,000/-. There are two aspects of transaction. On the one hand, business has an asset of Rs.20,000 while on the other hand, the business has to pay to the proprietor a sum of Rs. 20,000/- which is taken as proprietary capital.

Capital (equities) = Cash (Asset)

20,000 = 20,000

The term ‘Assets’ denotes the resources owned by a business while the term ‘Equities’ denotes the claims of various parties against the assets. Equities are of two types:

• Owner’s equity (or capital) is the claim of the owners against the assets of the business.

• Outsider’s equity (or liabilities) is the claim of outside parties such as creditors, debenture holders against the assets of the business. Since either owners or outsiders claim all the assets of the business, the total assets will be equal to total liabilities. Thus,

Equities = Assets, Liabilities + Capital = Assets

The term “Accounting Equation” is also used to denote the relationship of equities to assets. The equation can be technically stated as, “for every debit there is an equivalent credit”. Entire system of double entry book keeping is based on this concept.

(vi)               Accounting Period Concept. A Business life is assumed to continue indefinitely. According to this concept, the life of the business is divided into appropriate intervals for studying results shown by the business and the financial position after each interval. Suppose it would not happen within the stipulated time means, necessary corrective steps cannot be initiated. In accounting such a segment or time interval is called “accounting period”. It is usually of one year and at the end of this period, income statement and balance sheet are prepared.

(vii)              Realization Concept. Accounting is a historical record of transactions. According to this concept, revenue is recognized at the point when property in goods passes to the buyer and he becomes legally liable to pay

(viii)            Periodic Matching of Costs and Revenue Concept. According to this concept income made by the business during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue. It is based on the accounting period concept.