Accounting Concepts

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Accounting Principles, Concepts and Conventions

Accounting principles are guidelines & standards, which have been accepted by the accounting profession in preparation and presentation of accounts of the business. It is approved and normally accepted by the government bodies &controlling authorities.

Accounting principles are uniform in order to understand in the same sense by those using it. Also they are not rigid (i.e. inflexible) like principle of gravity but they are flexible. This is because mainly the account principles are social science. Accounting principles are not universal and permanent as they are not discovered but are developed by man from time to time. Thus the development of accounting principles is a continuous process.

Accounting principles are evolved over the year by following: 1. The Professional Institutions like the
“INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA” 
 
2. The legislation of the country like:
“COMPANY LAW BOARD (CLB)”
 
“CENTRAL BOARD OF DIRECT TAXES (CBDT)” etc

ACCOUNTING CONCEPTS AND CONVENSIONS

The financial accounting model processes the economic transactions to produce financial statements as shown below:

The main objective is to maintain uniformity and consistency in accounting records. These concepts constitute the very basis of accounting. The framework of financial accounting is based on several concepts (also referred to as postulates, conventions and principle). The important concepts are as follows:

* Business entity concept
* Money measurement concept
* Going concern concept
* Accounting period concept
* Accounting cost concept
* Duality aspect concept
* Realization concept
* Accrual concept
* Matching concept
* Conservatism Concept
* Stable Monetary Unit Concept

* 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

Significance: The following points highlight the significance of business entity concept: This concept helps in ascertaining the profit of the business as only the business expenses and revenues are recorded and all the private and personal expenses are ignored. This concept restraints accountant from recording owner’s private/personal transactions. It also facilitates the recording and reporting of business transactions from the business point of view.

* 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, loyalty, honesty of employees is 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.

Significance: The following points highlight the significance of money measurement concept: This concept guides accountants what to record and what not to...
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