Basic Accounting Concepts and Principles
Accounting - Basic Concepts
The first two accounting concepts, namely, Business Entity Concept and
Money Measurement Concept are the fundamental concepts of
accounting. Let us go through each one of them briefly:
1.Business Entity Concept
According to this concept, the business and the owner of the business are
two different entities. In other words, I and my business are separate.
For example, Mr A starts a new business in the name and style of M/s
Independent Trading Company and introduced a capital of Rs 2,000,000
in cash. It means the cash balance of M/s Independent Trading Company
will increase by a sum of Rs 2,000,000/-. At the same time, the liability
of M/s Independent Trading Company in the form of capital will also
increase. It means M/s Independent Trading Company is liable to pay Rs
2,000,000 to Mr A.
2. Money Measurement Concept
According to this concept, “we can book only those transactions in our
accounting record which can be measured in monetary terms.”
3. Going Concern Concept
Our accounting is based on the assumption that a business unit is a going
concern. We record all the financial transaction of a business in keeping
this point of view in our mind that a business unit is a going concern; not
a gone concern. Otherwise, the banker will not provide loans, the
supplier will not supply goods or services, the employees will not work
, properly, and the method of recording the transaction will change
altogether.
For example, a business unit makes investments in the form of fixed
assets and we book only depreciation of the assets in our profit & loss
account; not the difference of acquisition cost of assets less net
realizable value of the assets. The reason is simple; we assume that we
will use these assets and earn profit in the future while using them.
Similarly, we treat deferred revenue expenditure and prepaid
expenditure. The concept of going concern does not work in the
following cases:
• If a unit is declared sick (unused or unusable unit).
• When a company is going to liquidate and a liquidator is appointed
for the same.
• When a business unit is passing through severe financial crisis and
going to wind up.
4. Cost Concept
It is a very important concept based on the Going Concern Concept. We
book the value of assets on the cost basis, not on the net realizable value
or market value of the assets based on the assumption that a business
unit is a going concern. No doubt, we reduce the value of assets
providing depreciation to assets, but we ignore the market value of the
assets.
The cost concept stops any kind of manipulation while taking into
account the net realizable value or the market value. On the downside,
this concept ignores the effect of inflation in the market, which can
sometimes be very steep. Still, the cost concept is widely and universally
accepted on the basis of which we do the accounting of a business unit.
5. Dual Aspect Concept
Accounting - Basic Concepts
The first two accounting concepts, namely, Business Entity Concept and
Money Measurement Concept are the fundamental concepts of
accounting. Let us go through each one of them briefly:
1.Business Entity Concept
According to this concept, the business and the owner of the business are
two different entities. In other words, I and my business are separate.
For example, Mr A starts a new business in the name and style of M/s
Independent Trading Company and introduced a capital of Rs 2,000,000
in cash. It means the cash balance of M/s Independent Trading Company
will increase by a sum of Rs 2,000,000/-. At the same time, the liability
of M/s Independent Trading Company in the form of capital will also
increase. It means M/s Independent Trading Company is liable to pay Rs
2,000,000 to Mr A.
2. Money Measurement Concept
According to this concept, “we can book only those transactions in our
accounting record which can be measured in monetary terms.”
3. Going Concern Concept
Our accounting is based on the assumption that a business unit is a going
concern. We record all the financial transaction of a business in keeping
this point of view in our mind that a business unit is a going concern; not
a gone concern. Otherwise, the banker will not provide loans, the
supplier will not supply goods or services, the employees will not work
, properly, and the method of recording the transaction will change
altogether.
For example, a business unit makes investments in the form of fixed
assets and we book only depreciation of the assets in our profit & loss
account; not the difference of acquisition cost of assets less net
realizable value of the assets. The reason is simple; we assume that we
will use these assets and earn profit in the future while using them.
Similarly, we treat deferred revenue expenditure and prepaid
expenditure. The concept of going concern does not work in the
following cases:
• If a unit is declared sick (unused or unusable unit).
• When a company is going to liquidate and a liquidator is appointed
for the same.
• When a business unit is passing through severe financial crisis and
going to wind up.
4. Cost Concept
It is a very important concept based on the Going Concern Concept. We
book the value of assets on the cost basis, not on the net realizable value
or market value of the assets based on the assumption that a business
unit is a going concern. No doubt, we reduce the value of assets
providing depreciation to assets, but we ignore the market value of the
assets.
The cost concept stops any kind of manipulation while taking into
account the net realizable value or the market value. On the downside,
this concept ignores the effect of inflation in the market, which can
sometimes be very steep. Still, the cost concept is widely and universally
accepted on the basis of which we do the accounting of a business unit.
5. Dual Aspect Concept
