Accountancy XI Content
Basic concepts of accounting
Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. There are eight basic concepts in accounting.
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 withdraws cash/goods from the business 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.
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,
All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc.
This concept states that revenue from any business transaction should be included in the accounting records only when it is realized. Revenue is said to have been realized when cash has been received or right to receive cash on the sale of goods or services or both has been created.
The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realized, the next step is to allocate it to the relevant accounting period.
Cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them.
Assets = Liabilities + Capital