Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. In order to maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. These are foundations of preparing and maintaining accounting records. Here are following various accounting concepts, their meaning and significance:-
1. 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.
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.
This concept restraints accountant from recording of owner’s private/ personal transactions.
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. Money measurement concept
This concept assumes that all business transactions must be in terms of money, that is in the currency of a country. Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts.
This concept guides accountants what to record and what not to record.
It helps in recording business transactions uniformly.
If all the business transactions are expressed in monetary terms, it will be easy to understand the accounts prepared by the business enterprise.
It facilitates comparison of business performance of two different periods of the same firm or of the two different firms for the same period.
3. Going concern concept
This concept states that a business firm will continue to carry on its activities for an indefinite period of time. 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.
This concept facilitates preparation of financial statements.
On the basis of this concept, depreciation is charged on the fixed asset.
It is of great help to the investors, because, it assures them that they will continue to get income on their investments.
In the absence of this concept, the cost of a fixed asset will be treated as an expense in the year of its purchase.
A business is judged for its capacity to earn profits in future.
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.
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