Accounting concepts are the basic rules, assumptions, and conditions that define the parameters and constraints within which accounting operates. In other words, accounting concepts are generally accepted accounting principles, which form the fundamental basis of consistently preparing the universal form of financial statements. Show Objectives of Accounting Concepts
You are free to use this image on your website, templates, etc., Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Accounting Concept (wallstreetmojo.com) Top 12 Accounting ConceptsBelow mentioned are the generally accepted accounting conceptsGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more used widely around the world. #1 – Entity ConceptThe entity concept is a concept that explains to you that your business is different from yours. It tells you that the business owner and the owner are two separate entities. The statute recognizes the entity as an artificial person. The entity must prepare its own set of financial statements and record its business transactions accordingly. #2 – Money Measurement ConceptMoney Measurement conceptAccording to the money measurement concept of accounting, a company should only record in its financial statement only those events or transactions that are measured in terms of money. If assigning the monetary value to the transactions is not possible, it will not be recorded in the financial statement.read more states that only those transactions are recorded and measured in monetary terms. In simple words, only financial transactions are recorded in books of accounts. #3 – Periodicity ConceptThe periodicity concept states that the entity or the business needs to carry out the accounting for a definite period, usually the financial year. The period for drawing financial statements can vary from monthly to quarterly to annually. It helps in identifying any changes occurring over different periods. #4 – Accrual ConceptAccording to Accrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more, the transaction is recorded on a mercantile basis. In other words, transactions are to be recorded as and when they occur, not as and when the cash is received or paid, and for the period the transaction pertains. #5 – Matching ConceptThe matching conceptThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period.read more is linked to the Periodicity concept and Accrual concept. The matching concept states that during the period for which revenue has been considered, the entity needs to account for expenses only relating to that period. It means that the entity has to record revenue and expenses for the same period #6 – Going Concern ConceptGoing concern conceptGoing Concern concept is an accounting principle which states that the accounting statements are formulated with a belief that the business will not be bankrupt or liquidated for the foreseeable future, which generally is for a period of 12 months.read more assumes that the business will be carried out on an ongoing basis. Thus, the books of accounts for the entity are prepared such that the business will be carried on for years to come #7 – Cost ConceptThe cost concept states that any asset that the entity records shall be recorded at historical cost value, i.e., the asset’s acquisition cost. #8 – Realization ConceptThis concept is related to the cost concept. The realization concept states that the entity should record an asset at cost until and unless the realizable valueRealizable value is the net consideration from sales proceeds of any assets in the normal course of business after deduction of incidental expenses. It is common for the valuation of inventories under International Financial Reporting Standards and other accepted accounting policies.read more of the asset has been realized. Practically, it will be correct to say that the entity will record the realized value of the asset once the asset has been sold or disposed of off, as the case may be. #9 – Dual Aspect ConceptThis concept is the backbone of the double-entry bookkeeping system. It states that every transaction has two aspects, debit and credit. The entity has to record every transaction and give effect to both debit and credit elements. #10 – ConservatismThis conservatism conceptThe conservatism principle of accounting guides the accounting, according to which there is any uncertainty. All the expenses and liabilities should be recognized. In contrast, all the revenues and gains should not be recorded, and such revenues and profits should be recognized only when there is reasonable certainty of its actual receipt.read more states that the entity needs to prepare and maintain its book of accounts on a prudent basis. Conservatism says that the entity has to provide for any expected losses or expenses; however, it does not recognize future revenue expected. #11 – ConsistencyThe accounting policiesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more are followed consistently to achieve the intention of comparing the financial statements of various periods or for that matter of multiple entities. #12 – MaterialityThe materiality conceptIn any financial accounting statements, there are some transactions that are too small to be recognized and such transactions might not have any impact on the analysis of the financial statement by an external observer; removal of such irrelevant information to keep the financial statement crisp and consolidated is called as the concept of materiality.read more explains that the financial statements should show all the items having a significant economic effect on the business. It allows ignoring the other concepts if the item to be disclosed has an insignificant impact on the entity’s business, and the efforts involved in recording the same are not worthwhile Importance of Accounting Concept
Accounting Concept vs. ConventionIn common parlance, accounting concepts and accounting conventionsAccounting conventions are specific guidelines for complicated and unclear business transactions, not compulsory or legally binding, but these generally accepted principles maintain consistency in financial statements. These conventions help in standardizing the financial reporting process, disclosure of transactions, and relevance.read more are used interchangeably. However, there are quite a few differences in both these terms.
Advantages
DisadvantagesConclusionAccounting concepts are the generally accepted rules and assumptions that assist accountants in preparing financial statements. In layman’s terms, they are the fundamental building blocks of the transactions of the businessA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more. In layman terms, they are the fundamental building blocks of the accounting systemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm.read more, with the primary objective of providing uniform and consistent financial information to relevant investors and all the stakeholders. It provides the framework for recording the financial transactions of the business. Recommended ArticlesThis has been a guide to What is Accounting Concept & its Definition. Here we discuss the types of accounting concepts and objectives and their importance, advantages, and disadvantages. You can learn more about it from the following articles – |