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The rules and conventions of accounting are commonly referredto as the conceptual framework of accounting. As with anydiscipline or body of knowledge, some underlying theoreticalstructure is required if a logical and useful set of practices andprocedures are to be developed for reaching the goals of theprofession and for expanding knowledge in that field. Such a bodyof principles is needed to help answer new questions that arise.Accounting theory may be defined as logical reasoning in theform of a set of broad principles that
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Provide a general frame of reference by which accountingpractice can be evaluated.
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Guide the development of new practices & procedures.
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Provide a coherent set of logical principles that form thegeneral frame of reference for the evaluation anddevelopment of sound accounting practices.
Q. What do you mean by basic accounting concepts?
Accounting has come to present status after a period of severalhundred years. During this period certain accountingassumptions, concepts and conventions have emerged.Accountants universally in the recording, classification,summarization and reporting of the transactions follow these.Accounting assumptions, concepts and conventions are calledGenerally Accepted Accounting Principles (GAAP) since they havebeen commonly accepted by professional accounting world asgeneral guidelines for preparing financial statements and reports.Thus accounting principles are rules of action adopted byaccountants.Accounting principles are man-made. Unlike the principles of physical and natural sciences, accounting principles are noteternal truths. They have been evolved over the years keeping inview their relevance, objectivity and feasibility. AccountingStandard Board (ASB) of the Institute of Chartered Accountantsof India makes accounting rules in India. Knowledge of accounting concepts facilitates the learning of accounting, the
 
language of business, by users of accounting information. Theusers of accounting information include shareholders, investors,lenders, suppliers of goods and services (creditors), customers,employees, government and its agencies and public at large.
Q. List the basic accounting concepts.
The Institute of Chartered Accountants of India in its AccountingStandard-I (AS-I) has stated that going concern, accrual andconsistency are fundamental accounting assumptions. For thesake of convenience all accounting concepts are discussed undertwo headings:
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Basic accounting concepts
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Accounting concepts related to income measurementBasic Accounting Concepts are:
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Entity Concept
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Money Measurement Concept
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Going Concern Concept
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Cost Concept
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Dual Aspect Concept
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Full Disclosure Concept
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Objectivity Concept
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Accrual ConceptAccounting concepts related to income measurement are:
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The Time Period Concept (Periodicity Concept)
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The Revenue Recognition (Realisation) Concept
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The Matching Concept
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The Materiality Concept
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The Consistency Concept
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The Conservatism (Prudence) Concept
Q. Explain the following Basic accounting concepts:
 
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Entity Concept
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Money Measurement Concept
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Going Concern Concept
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Cost Concept
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Dual Aspect Concept
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Full Disclosure Concept
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Objectivity Concept
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Accrual Concept
Entity Concept
In accounting, the entity of business is considered separate fromthe existence of its owners. Accounts are kept for the entity asdistinct from owners. Thus, money invested by the proprietor byway of capital is considered to be the liability of the business tothe proprietor. If proprietor withdraws some cash or goods, theyare treated as drawings but not as business expense. Capital isreduced by the amount of drawings. The principle of separateentity is quite visible in the case of corporate bodies since acompany is a legal entity separate from the shareholders whoown it. In case of a corporate body the liability of theshareholders is limited to the extent of the value of shares heldby them. But in case of non-corporate bodies the owners orpartners remain legally liable for the debts of the business evenafter its closure. Their private property can be sold to dischargethe liability of the firm.
Money Measurement Concept
In accounting, a record is made only of those facts ortransactions that can be expressed in monetary terms. Itprovides a common yardstick,
i.e.,
money for measuring,recording and summarizing the transaction. Events, which cannotbe expressed in money terms, do not find a place in accountbooks. For example, salary paid to manager is recorded inaccount books but his competence, which cannot be expressed inmonetary terms, is not recorded in the books. The application of 
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