* Prudence concept – states that caution should be exercised when making accounting judgements. This means that liability and losses should not be understated while assets and profits should not be overstated. Therefore recording all loses at once and in full and profits recognised when they arise. This is to prevent overstatement of financial position.
* Business entity concept - states that the financial affairs of the business should be completely separate from those of the owner. The business is treated as a separate entity. This means that personal transactions must not be confused with business transactions. for sole propertiorships and partnerships this law does not apply as there is no distinction between business and its owner. However limited companies there is clear distinction between businesses and it owners.
* Historic cost concept- states that the value of the assets shown on the balance sheet should be based on there historic cost i.e. the cost when purchased.
* Going concern concept- assumes that the financial statements should be prepared on the assumption that the business will continue trading for the foreseeable future. in other words it assumes there is no intention to sell the non current assets of the business. such a sale may arise where the business is in financial difficulties and needs to pay amounts borrowed due for repayment.
* Dual Aspect concept- states that every transaction has two effects on the business accounts. Example buying a car will have an effect on cash (decrease) and asset (increase). Recording dual aspect ensure that the balance sheet will continue to balance.
* Money Measurement concept- states that the financial records including the assets, liabilities and capital should be expressed in monetary terms, with a reasonable degree of reliability.
* Accruals and matching concept- states that in calculating annual profit, all revenue earned must...