Account is a system evolves to achieve a set of objectives. In order to achieve the goals, we need a set of rules or guide lines. These guide lines are termed here as “basic accounting concepts”. The term ‘concept’ means an idea or thought. Basic accounting concepts are the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting.
These concepts are termed as “generally accepted accounting principles”. These are the broad working rules of accounting activity. They are evolved over a period in response to changing business environment. They are developed and accepted by the accounting profession. The concepts guide the identification of events and transactions to be accounted for. The concepts help in bringing about uniformity in the practice of accounting. In accountancy following concepts are quite popular.
1.Business entity concept
2. Going concern concept
3. Money measurement concept
4. Cost Concept
5. Accounting Period Concept
6. Dual Aspect Concept
7. Watching concept.
1.Business entity concept:
Business is treated separate from the proprietor. All the transactions are recorded in the books of the proprietor. The proprietor is also treated as a creditor for the business. When he contributes capital he is treated as a person who has invested his amount in the business. Therefore, capital appears in the liabilities of balance sheet of the proprietor.
Effects of this concept: Financial position of the business can be easily found out and Earning capacity of business can be easily ascertained.
2. Going concern concept
This concept relates with the long life of the business. The assumption is that business will continue to exist unlimited period unless it is dissolved due to some reason or the other. When final accounts are prepared, record is made for outstanding expenses and prepaid expenses because of the assumption that business will continue. Going concern concept helps other business undertaking to make contracts with specific business unit for business dealing in future.
Effects of this concept: Working life of asset is taken into consideration for writing of depreciation because of this concept and Accountant always remains hopeful about continuity of business. Therefore, he does not stop writing transactions even though the condition of business is deteriorating.
3. Money measurement concept
Only those transactions are recorded in accounting which can not be expressed in terms of money. The transactions which can not be expressed in money fall beyond the scope of accounting. One serious short coming of this concept is that the money value of that date is recorded on which transaction has taken place. It does not recognize the changes in the purchasing power of monitory unit.
Effect of this concept:
a). In the absence of this concept, it would have not been possible to add various processions. For Ex., a proprietor has 40 chairs, 50 tables, 15 machines, and 20 acres of land. He cannot add them. But total amount of all these processions can be easily found out by finding out their value in money.
b). It fails to keep any record of such matters which cannot be expressed in terms of money. For Ex., ability of the board of directors, quality of the articles produced and efficiency workers cannot be recorded.
4. Cost Concept
According to this concept, an asset is recorded at its cost in the books of account, i.e., the price, which is paid at the time of acquiring it. In balance sheet, these assets appear not at cost price every year, but depreciation is deducted and they appear at the amount, which is cost less depreciation. Under this concept, all such events are ignored which affect the business but have no cost. For example, if an important and influential director dies, then the earning capacity and position o the business will be affected. But this event has no cost. Hence it will not be recorded in account books.
Effects of this Concept:
- Under this concept, market price is ignored. Balance sheet indicates financial position on cot and expired cost basis.
- This concept is mainly for fixed assets. Current assets are not affected by it. Current assets appear in balance sheet at cost or market price whichever is lower. But both these assets are acquired at cost price.
5. Accounting Period Concept:
Every businessman wants to know the result of his investment and efforts after a certain period. Usually one-year period is regarded as an ideal for this purpose. It may be 6 months or 2 years also. This period is called accounting period. It depends on the nature of business and object of the proprietor of business. From taxation point of view one year period is necessary as income-tax is payable every year.
Effects of this concept:
- Financial position and earning capacity of one year may be compared with another year.
- These comparisons help the management in planning and increasing the efficiency of business.
6. Dual Aspect Concept:
Under this concept, every transaction has got a two fold aspects – (i) receiving of benefit and (ii) giving of that benefit. For instance, when a firm acquires an asset (receiving of the benefit), it must have to pay cash (giving of the benefit). Therefore, two accounts are to be passed in the books of accounts, one for receiving the benefit and the other for giving the benefit. Thus, there will be a double entry for every transaction – debit for receiving the benefit and credit for giving the benefit.
Effects of this concept:
- This concept is of great help in indicating the true position of the business.
- This concept helps in detecting the errors of employees and in having strict control over them.
- The Accounting Equation, i.e., Assets = Equities (or liabilities + capital) is based on this concept.
7. Watching concept:
Every businessman is eager to make maximum profit at minimum cost. Hence, he tries to find out revenue and cost during the accounting period. An accountant records all expenses of a year (whether there are paid in cash or are outstanding) and all revenues of a year (whether they are received in cash or accrued). Expenses, which are incurred during a particular accounting period for earning the revenue of the related period, are to be considered. All expenses incurred during the accounting period must not be taken. only relevant cost should be deducted from the revenue of a period for periodic income statement. The process of relating costs to revenue is called ‘matching process’.
Effect of this concept:Proprietor can easily know about his profit or loss and On the basis of this concept, he can make efforts to create economy, increasing efficiency and increasing his income.
