What Do You Mean by Accounting Concepts?
Accounting concepts are the basic rules, assumptions, and guidelines that accountants follow while recording financial transactions. These concepts ensure that accounting practices are consistent, reliable, and comparable across different periods and organizations. They serve as the foundation of financial accounting and help in preparing true and fair financial statements.
When accountants record transactions in the books of accounts, these accounting concepts guide how, when, and what should be recorded. Without these concepts, accounting data could become inconsistent and unreliable.
Important Accounting Concepts That Guide the Accountant at the Recording Stage
1. Business Entity Concept
According to this concept, the business is treated as a separate entity from its owner. All business transactions are recorded separately from the personal transactions of the owner.
Example: If the owner invests ₹1,00,000 into the business, it will be recorded as capital in the business books.
2. Money Measurement Concept
Only those transactions which can be measured in monetary terms are recorded in the books. Non-monetary items like employee skills or customer satisfaction are not recorded.
Example: Purchase of goods for ₹5,000 is recorded, but the loyalty of a customer is not recorded.
3. Going Concern Concept
This concept assumes that the business will continue to operate for a long time in the future. Assets are recorded at their original cost rather than liquidation value.
Example: A machine bought for ₹50,000 is recorded at cost even if its market value falls to ₹40,000.
4. Cost Concept
This concept states that assets should be recorded at their purchase price (historical cost), and not at their market value.
Example: Land purchased for ₹2,00,000 will be shown at ₹2,00,000 in the books, even if its current market value is ₹3,00,000.
5. Dual Aspect Concept
Every transaction has two aspects – a debit and a credit. This concept is the basis of the double-entry system of accounting.
Example: If goods worth ₹10,000 are purchased on credit, then:
Purchases A/c Dr. ₹10,000 To Creditors A/c ₹10,000
6. Accounting Period Concept
This concept divides the life of a business into fixed time periods, usually a financial year (April to March), for reporting purposes.
Example: Income and expenses are recorded and reported annually, even if the business continues beyond that year.
7. Matching Concept
This concept states that expenses should be matched with the revenues they help to generate in the same accounting period.
Example: If goods are sold in March 2025, the related expenses like commission and transport should also be recorded in March 2025.
8. Realization Concept
Revenue should be recognized when it is earned and not when the cash is received.
Example: If goods are sold on credit in January, the revenue is recorded in January even if payment is received in February.
9. Accrual Concept
Expenses and incomes should be recorded when they are incurred or earned, not when cash is paid or received.
Example: If rent for March is paid in April, it should still be recorded as an expense for March.
Conclusion
Accounting concepts are essential for maintaining uniformity and consistency in financial records. These principles guide accountants at the recording stage and help ensure that financial statements are accurate, comparable, and follow legal requirements. Understanding these concepts also builds a strong foundation for anyone learning or working in the field of accounting.