The accounting concepts refer to the basic assumptions and rules and principles which work as the basis of recording business transactions and preparing accounts. This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities.
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.
Basic 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 dual effect.
3. Going Concern Concept: According to this concept, it assumes that an entity will continue to operate indefinitely. On 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 their 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 that cannot be expressed in terms of money do not find a 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 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 concerns adopt a twelve-month period for measuring the income of the concern. This time interval is called the ‘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 the accounting period.
7. Realization Concept: This concept emphasizes 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.