13-08-2012, 12:27 PM
ACCOUNTING CONCEPTS
accounting concepts.pdf (Size: 141.47 KB / Downloads: 476)
In the previous lesson, you have studied the meaning and nature of business
transactions and objectives of financial accounting. In order to maintain
uniformity and consistency in preparing and maintaining books of accounts,
certain rules or principles have been evolved. These rules/principles are
classified as concepts and conventions. These are foundations of preparing
and maintaining accounting records. In this lesson we shall learn about
various accounting concepts, their meaning and significance.
MEANING AND BUSINESS ENTITY CONCEPT
Let us take an example. In India there is a basic rule to be followed by
everyone that one should walk or drive on his/her left hand side of the road.
It helps in the smooth flow of traffic. Similarly, there are certain rules that
an accountant should follow while recording business transactions and
preparing accounts. These may be termed as accounting concept. Thus, this
can be said.
Accounting Concepts
Basic Accounting
The main objective is to maintain uniformity and consistency in accounting
records. These concepts constitute the very basis of accounting. All the
concepts have been developed over the years from experience and thus they
are universally accepted rules. Following are the various accounting
concepts that have been discussed in the following sections.
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. Thus, the accounting records are made in the books of accounts
from the point of view of the business unit and not the person owning the
business. This concept is the very basis of accounting.
Let us take an example. Suppose Mr. Sahoo started business investing
Rs100000. He purchased goods for Rs40000, Furniture for Rs20000 and
plant and machinery of Rs30000. Rs10000 remains in hand. These are the
assets of the business and not of the owner. According to the business entity
concept Rs100000 will be treated by business as capital i.e. a liability of
business towards the owner of the business.
MONEY MEASUREMENT CONCEPT
This concept assumes that all business transactions must be in terms of
money, that is in the currency of a country. In our country such transactions
are in terms of rupees.
Thus, as per the money measurement concept, transactions which can be
expressed in terms of money are recorded in the books of accounts. For
example, sale of goods worth Rs.200000, purchase of raw materials
Rs.100000, Rent Paid Rs.10000 etc. are expressed in terms of money, and
so they are recorded in the books of accounts. But the transactions which
cannot be expressed in monetary terms are not recorded in the books of
accounts. For example, sincerity, loyality, honesty of employees are not
recorded in books of accounts because these cannot be measured in terms
of money although 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; For example, a company
purchases a plant and machinery of Rs.100000 and its life span is 10 years.
According to this concept every year some amount will be shown as
expenses and the balance amount as an asset. Thus, if an amount is spent
on an item which will be used in business for many years, it will not be
proper to charge the amount from the revenues of the year in which the
item is acquired. Only a part of the value is shown as expense in the year
of purchase and the remaining balance is shown as an asset.