ACCOUNTING CONCEPTS AND CONVENTIONS
There are some concepts and conventions which are followed in accounting for a long time.
These concepts constitute the very basis of accounting. All the concepts have been developed
over the years from experience and thus, are universally accepted rules and are termed as
‘Generally Accepted Accounting Principle’ or GAAP. In accounting, there are many
conventions or practices which are used while recording the transactions in the books of
accounts.
Accounting Concepts refer to the basic assumptions, rules and principles which work as the
basis of recording of business transactions and preparing accounts.
Main Accounting Concepts are:
➢ Business entity concept
➢ Money measurement concept
➢ Going concern concept
➢ Accounting period concept
➢ Accounting cost concept
➢ Dual aspect concept
➢ Matching concept
➢ Realisation concept
➢ Accrual concept
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. For example, when the owner invests money in the business, it is recorded as liability
of the business to the owner. Similarly, when the owner takes away from the business
cash/goods for his/her personal use, it is not treated as business expense.
Money Measurement Concept
This concept assumes that all business transactions must be in terms of money, that is in a
country's currency. In our country, such transactions are made in rupees. Thus, as per the money
measurement concept, transactions that can be expressed in terms of money are recorded in the
books of accounts. For example, the sale of goods worth Rs.200000, Rent Paid Rs.10000 etc.
are expressed in terms of money, and so they are recorded in the books of accounts. But the
transactions that cannot be expressed in monetary terms are not recorded in the books of
accounts.
For example, sincerity and loyalty are not recorded in books of accounts because these
cannot be measured in terms of money. However, they do affect the profits and losses of
the business concern.
Going Concern Concept
This concept states that a business firm will continue to carry on its activities for an indefinite
period of time. Simply stated, 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.
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 the accounting
period concept. Thus, this concept requires that a balance sheet and profit and loss account
should be prepared at regular intervals. This is necessary for different purposes like, calculation
of profit, ascertaining financial position, tax computation etc.
Accounting Cost Concept
It states that all assets are recorded in the books of accounts at their purchase price, which
includes cost of acquisition, transportation and installation and not at its market price. It means
that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of
accounts at a price paid for them.
Dual Aspect Concept
The dual aspect is the foundation or basic principle of accounting. It provides the very basis of
recording business transactions in the books of accounts. This concept assumes that every
transaction has a dual effect, i.e., it affects two accounts on their respective opposite sides.
Therefore, the transaction should be recorded in two places. It means both aspects of the
transaction must be recorded in the books of accounts. Thus, the duality concept is commonly
expressed in terms of fundamental accounting equation :
Assets = Liabilities + Capital
Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the revenues
must belong to the same accounting period. So once the revenue is realised, the next step is to
allocate it to the relevant accounting period. This can be done with the help of accrual concept
If the revenue is more than the expenses, it is called profit. If the expenses are more than
revenue it is called loss. This is what exactly has been done by applying the matching concept.
Therefore, the matching concept implies that all revenues earned during an accounting year,
whether received/not received during that year and all cost incurred, whether paid/not paid
during the year should be taken into account while ascertaining profit or loss for that year.
Significance
1.It guides how the expenses should be matched with revenue for determining exact profit or
loss for a particular period.
2.It is very helpful for the investors/shareholders to know the exact amount of profit or loss of
the business.
There are some concepts and conventions which are followed in accounting for a long time.
These concepts constitute the very basis of accounting. All the concepts have been developed
over the years from experience and thus, are universally accepted rules and are termed as
‘Generally Accepted Accounting Principle’ or GAAP. In accounting, there are many
conventions or practices which are used while recording the transactions in the books of
accounts.
Accounting Concepts refer to the basic assumptions, rules and principles which work as the
basis of recording of business transactions and preparing accounts.
Main Accounting Concepts are:
➢ Business entity concept
➢ Money measurement concept
➢ Going concern concept
➢ Accounting period concept
➢ Accounting cost concept
➢ Dual aspect concept
➢ Matching concept
➢ Realisation concept
➢ Accrual concept
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. For example, when the owner invests money in the business, it is recorded as liability
of the business to the owner. Similarly, when the owner takes away from the business
cash/goods for his/her personal use, it is not treated as business expense.
Money Measurement Concept
This concept assumes that all business transactions must be in terms of money, that is in a
country's currency. In our country, such transactions are made in rupees. Thus, as per the money
measurement concept, transactions that can be expressed in terms of money are recorded in the
books of accounts. For example, the sale of goods worth Rs.200000, Rent Paid Rs.10000 etc.
are expressed in terms of money, and so they are recorded in the books of accounts. But the
transactions that cannot be expressed in monetary terms are not recorded in the books of
accounts.
For example, sincerity and loyalty are not recorded in books of accounts because these
cannot be measured in terms of money. However, they do affect the profits and losses of
the business concern.
Going Concern Concept
This concept states that a business firm will continue to carry on its activities for an indefinite
period of time. Simply stated, 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.
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 the accounting
period concept. Thus, this concept requires that a balance sheet and profit and loss account
should be prepared at regular intervals. This is necessary for different purposes like, calculation
of profit, ascertaining financial position, tax computation etc.
Accounting Cost Concept
It states that all assets are recorded in the books of accounts at their purchase price, which
includes cost of acquisition, transportation and installation and not at its market price. It means
that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of
accounts at a price paid for them.
Dual Aspect Concept
The dual aspect is the foundation or basic principle of accounting. It provides the very basis of
recording business transactions in the books of accounts. This concept assumes that every
transaction has a dual effect, i.e., it affects two accounts on their respective opposite sides.
Therefore, the transaction should be recorded in two places. It means both aspects of the
transaction must be recorded in the books of accounts. Thus, the duality concept is commonly
expressed in terms of fundamental accounting equation :
Assets = Liabilities + Capital
Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the revenues
must belong to the same accounting period. So once the revenue is realised, the next step is to
allocate it to the relevant accounting period. This can be done with the help of accrual concept
If the revenue is more than the expenses, it is called profit. If the expenses are more than
revenue it is called loss. This is what exactly has been done by applying the matching concept.
Therefore, the matching concept implies that all revenues earned during an accounting year,
whether received/not received during that year and all cost incurred, whether paid/not paid
during the year should be taken into account while ascertaining profit or loss for that year.
Significance
1.It guides how the expenses should be matched with revenue for determining exact profit or
loss for a particular period.
2.It is very helpful for the investors/shareholders to know the exact amount of profit or loss of
the business.
