Basic Accounting Concepts

Topics: Balance sheet, Generally Accepted Accounting Principles, Depreciation Pages: 4 (878 words) Published: September 6, 2008
Basic accounting concepts

Basic accounting concepts are the broad assumption, which underline the periodic financial accounts of business enterprises.

Most important concepts and conventions are:-

Going concern assumption
Accruals basis accounting
The materiality concepts
Historical cost

There also other concepts. Such as :
Entity concepts
Money measurement concepts
Separate valuation principle

The Going Concern Assumption

The going concern assumption implies that the business will continue in operation for foreseeable future, and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.

Suppose that J&J company bought a printing machine for their printing business with the cost of $150000. And it is expected to last that machine for 15 years. And the depreciation cost is set 10000 per year.

According to going concern assumption it is assumed that the business will continue its operations and asset will live out its full 15 years in use. And depreciation charge of 10000 will be charged every year. After one year the net book value will be (150000-10000)= 140000 after two years it will be 130000 after three years it will be 120000 and so on. Thus it will be written down until it has been written down to value of zero after 15 years.

Suppose that it has no other operational use outside the business. So in a forceful sale it would have to sale as scrap only. And the scrap value is only 5000.So after the one year the value of the asset will be 140000. But if it had to sale forcefully after one year, the value will be only 5000. And in the balance sheet it should be written down only 5000. And rest of the value that means (net book value – scrap value) 135000 will be shown as expenses.

Accruals basis Accounting


Prudence is the inclusion of a degree of caution in the exercise of judgements...
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