ACCOUNTING CONCEPTS
IN THIS NOTES YOU WILL BE ABLE TO LEARN…
What is Accounting Concepts
Explain different accounting concepts
“Accounting concept refers to the basic assumptions and rules and principles which work as the basis of
recording of business transactions and preparing account”. These accounting concepts or principles are
known as Generally Accepted Accounting Principles(GAAP).
Thus, GAAP are set of rules, concepts and guidelines for preparing financial statements. GAAP include not
only accounting principles but also procedures for applying these principles.
Following are the various accounting concepts that have been discussed in the following :
Separate Entity Concept
Materiality Concept
Money Measurement Concept
Going concern Concept
Accrual Concept
Matching Concept
Dual Aspect Concept
Separate Entity Concept
This concepts assumes that, for accounting purpose, the business enterprise and its owners are two separate
independent entities. Thus, the business and personal transactions of its owner are separate. Business transactions are
recorded in the books of account from the business point of view and not from the owner’s point of view. This concept
is applicable to all forms of Business Organizations.
For example: Suppose Mr. Ram started business investing Rs.200000. He purchased goods for Rs.80000, furniture for
Rs. 40000 and plant and machinery of Rs.60000. Rs.20000 remains as cash in hand. These are the assets of the
business and not of the owner. According to the business entity concept Rs.200000 will be treated by business as
capital i.e a liability of business towards the owner of he business.
Materiality Concept
The Materiality concept states that an information is material to the financial statement if it influences the economic
decisions of financial statement. In other words, an organization may disregard all trivial matters and disclose
everything that is important to the stakeholders. The concept of materiality is relative in size and importance. Some
financial information might be material to one company but might be immaterial to another.
For Example: A brand new pen and a car, both are assets of the business unit. Although the pen is still is in use at the
year end, its original cost is so insignificant that it would be waste of time to value that and include in Assets. Instead it
is written off to revenue in the period in which it was purchased.
IN THIS NOTES YOU WILL BE ABLE TO LEARN…
What is Accounting Concepts
Explain different accounting concepts
“Accounting concept refers to the basic assumptions and rules and principles which work as the basis of
recording of business transactions and preparing account”. These accounting concepts or principles are
known as Generally Accepted Accounting Principles(GAAP).
Thus, GAAP are set of rules, concepts and guidelines for preparing financial statements. GAAP include not
only accounting principles but also procedures for applying these principles.
Following are the various accounting concepts that have been discussed in the following :
Separate Entity Concept
Materiality Concept
Money Measurement Concept
Going concern Concept
Accrual Concept
Matching Concept
Dual Aspect Concept
Separate Entity Concept
This concepts assumes that, for accounting purpose, the business enterprise and its owners are two separate
independent entities. Thus, the business and personal transactions of its owner are separate. Business transactions are
recorded in the books of account from the business point of view and not from the owner’s point of view. This concept
is applicable to all forms of Business Organizations.
For example: Suppose Mr. Ram started business investing Rs.200000. He purchased goods for Rs.80000, furniture for
Rs. 40000 and plant and machinery of Rs.60000. Rs.20000 remains as cash in hand. These are the assets of the
business and not of the owner. According to the business entity concept Rs.200000 will be treated by business as
capital i.e a liability of business towards the owner of he business.
Materiality Concept
The Materiality concept states that an information is material to the financial statement if it influences the economic
decisions of financial statement. In other words, an organization may disregard all trivial matters and disclose
everything that is important to the stakeholders. The concept of materiality is relative in size and importance. Some
financial information might be material to one company but might be immaterial to another.
For Example: A brand new pen and a car, both are assets of the business unit. Although the pen is still is in use at the
year end, its original cost is so insignificant that it would be waste of time to value that and include in Assets. Instead it
is written off to revenue in the period in which it was purchased.
