What is Accounting Concept

Accounting concepts and convention are assumptions

/postulates or laid down rules of accounting that need to
be followed in preparation of accounts and Financial
Statements
These are the theories on how and why certain categories
of transactions should be treated in a particular manner
Important types of Accounting concepts
1. Business Entity Concept-Business and its owners
are two separate entities. Hence, business and
owners can transact with each other.
2. Going Concern Concept- It is assumed that
business will continue in foreseeable future.It is
because of this concept we show prepaid expenses
as an asset in books of accounts
3. Money Measurement Concept-Accounting records
only those transactions which can be measured or
expressed in terms of money .For eg Loyalty of
employees can not be recorded in books of
accounts
4. Accounting period-For measuring financial results,
working life of business is split into short periods
called accounting period. Normally it is 1 year i.e 1 st
April to 31st March

5. Historical Cost- Accounting is concerned with past

events and it requires consistency and comparability
that is why it requires the accounting transactions to
be recorded at their historical costs and not the
current values. This is called historical cost concept
6. Dual Aspect concept-Every transaction shall have
two sided effects of same amount ( Debit and Credit)
eg, Cash sales of Rs 2000 .
Debit
Credit

Cash Account
Sales Account

Rs 2000
Rs 2000

7. Realisation concept- It tells that revenue is to be

recognized only when the rewards and benefits
associated with the items sold or service provided is
transferred, where the amount can be estimated
reliably and when the amount is recoverable. So
revenue is recognised when earned ignoring when
actual cash flows happens
8. Matching Concept- It requires
that expenses
incurred to earn the revenues recognised during
the accounting period should be recognised in that
time period and not in the next or previous period
Eg.Salary paid in 2012-13 relating to 2011-12 is an
expense for
2011-12
9. Conservatism Under the conservatism principle, if
there is uncertainty about incurring a loss, you

should tend toward recording the loss. Conversely, if

there is uncertainty about recording again, you
should not record the gain.This concept makes sure
that assets and income are not overstated and
liabilities and expenses are not understated.
10.
Materiality
- Financial statements are
prepared to help the users with their decisions.
Hence, all such information which has the ability to
affect the decisions of the users of financial
statements is material and this property of
information is called materiality.Materiality depends
upon the nature or size of event. This concept is also
helpful in deciding which items should appear as line
items and which ones are aggregated with others
11.
Accrual
concept-Business transactions are
recorded when they occur and not when the related
payments are received or made. This concept is
called accrual basis of accounting and it is
fundamental to the usefulness of financial accounting
information.

Accounting Equation
It is the foundation of double entry system of accounting.
The accounting equation displays that all assets are
either financed by borrowed money or
the owners
money.

Assets = Equities
Asset is something of value that company owns
Equities are the rights or claims over the asset.
Equities are further divided into

Owners equity/Capital
Liability

So accounting equation becomes

Assets = Capital+Liability