Accounting Concepts Part-1

The term ' accounting concepts ' includes those basic assumptions or conditions on which the science of accounting is based. These concepts are used by accountants and bookkeepers all over the world. Following are the most important accounting concepts: 1. Separate entity concept. 2. Going concern concept. 3. Money measurement concept. 4. Cost concept. 5. Dual aspect concept. 6. Accounting period concept. 7. Matching concept. 8. realization concept. These accounting concepts are explained below: 1. Separate Entity Concept: Accounts are kept for entities, as distinguished from the persons who are associated with these entities. In recording events in accounting, the important question is: "How do these events affect the entity?" How they affect the persons who own, operate, or otherwise are associated with the entity is irrelevant.For example, when a person invests Rs 200,000 into business it will be deemed that the owner has given that money to the business which will be shown as a 'liability' in the books of the business. In case the owner withdraws Rs 30,000 from the business, it will change the position and the net amount payable by the business to the owner will be shown only as Rs170,000. The concept of separate entity is applicable to all forms of business organizations. For example, in case of a sole proprietorship or partnership business, though the sole proprietor or partners are not considered as separate entities in the eyes of law, but for accounting purposes they will be considered as separate entities. 2. Going ConcernConcept: According to this concept it is assumed that an entity is a going concern - that it will continue to operate for an indefinite time period there is no intention to liquidate the particular business venture in the foreseeable future. On account of this concept, the accountant while valuing the asset does not take into account the sale value of assets. Moreover, he charges depreciation on fixed assets on the basis of their expected life rather than on their market values. For example, suppose that a company has just purchased a three-year insurance policy for Rs 45,000. If we assume that the business will continue inoperation for three years or more. We will consider the Rs 45,000 cost of insurance as an asset which provides services to the business over a three-year period. On the other hand, if we assume that the business is likely to terminate in the near future, the insurance policy should be reported at its cancellation value i.e. the amount refundable upon cancellation. Moreover, the concept applies to the business as a whole. When an enterprise liquidates a branch or one segment of its operations, the ability ofthe enterprise to continue as a going-concern is not impaired normally. The enterprise will not be considered as a going-concern when it has gone into liquidation. 3. Money Measurement Concept: In financial accounting, a record is made only of those information that can be expressed in monetary terms. In other words, no accounting is possible for an event or transaction which is not measurable in terms of money, e.g. passing an examination, delivering lecture in a meeting, winning a prize etc.These are events no doubt, but since these are not measurable in terms of money, there is no question of their accounting. Measurement of business events in money helps in understanding the state of affairs of business in a much better way. For example, If a business owns. 1,500kg of stock, one car, 1,500 square feet of building space etc. these amounts cannot be added to produce a meaningful total of what the business owns. However, if these items are expressed in monetary terms such as stock Rs 24,000, car Rs 300,000 and building Rs 500,000, all such items can be added in better way and precise estimate about the assets of the business will be available.