Accounting Principles can be divided into two categories.
(A) Accounting Conventions. (B) Accounting Concepts.
The term ‘Concepts’ denotes the basic assumptions or conditions upon which the science of accounting is based. Accounting is the language of business. The following are the important accounting concepts.
1. Business Entity: A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book unless the owner’s personal transaction involves adding and /or withdrawing resources from the business.
2. Dual aspect concept: This is the basic concept of accounting. The idea of double entry is fundamental to the accounting theory. Every financial transaction involves a two fold aspect, As yielding of the benefit and the giving of that benefit. Hence every business transaction has a duel effect.
3. Going concern concept: According to this concept it assumes that an entity will continue to operate indefinitely. In this basis, generally, assets are recorded based on their original cost and not on market value. Assets are assumed to be held and used for an indefinite period of time or during its estimated useful life. And that assets are not intended to be sold immediately or liquidated.
4. Money Measurement concept: Accounting records only monetary transactions. Transactions which cannot be expressed in term of money do not find place in the books of accounts.
5. Cost concept: According to this concept an asset is recorded in the book of account at the price paid to acquire it and and this cost is the basis for all subsequent accounting for the assets. Assets are not valued at market prices because these values keep on changing from time to time.
6.Accounting period concept: Generally business concern adopt twelve months period for measuring the income of the concern. This time interval is called ‘Accounting Period’. At the end of each accounting period an income and expenditure account and balance sheet are prepared. This balance sheet reveals the financial position of the business on the last day of accounting period.
7. Realization concept: This concept emphasises that profit should be considered when realized. It is not always easy to determine when the profit is realized.
8. Objectives concept: This concept implies that all accounting transactions should be evidenced and supported by business documents i.e invoices,vouchers etc. The supporting evidence should be objective, Capable of verification by auditors.