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The principles of accounting are built on a foundation of a few basic concepts. They are basic rules that are applied when
recording transactions and preparing financial statements. These rules must be applied for accounting records to provide
reliable information
The basic concepts used in accounting are:
Concept
Assumption/
Explanation
Definition
All transactions Only transactions that can
(1) Money
are recorded in be recorded in monetary
measurement
the
common terms are recorded in the
or Monetary
monetary unit
accounts.
Non
current
asset,
inventory, trade payable
and trade receivable can
be recorded in the books
as they have resulted
from transactions that can
be expressed in monetary
terms
business The owner and the
(2) Entity or The
unit is separate business are separate.
Business
from the owner. This is shown by the
concept
credit balance in the
capital account which
shows that the owner is a
creditor as the business
owes
him
money.
Personal
assets
and
liabilities are excluded
from
the
business
accounts. If the owner
owns separate businesses,
each one is treated
separately.
(3)
Going The business is
assumed to carry
concern
on its operation
indefinitely and
is not likely to
be liquidated in
the foreseeable
future.
(4) Historical Business events
and transactions
cost
are recorded at
the
historical
cost of that
event
or
transaction
Significance
Criticisms
It
enables
many
otherwise unlike items
to be added together. It
also makes it possible to
compare
financial
statements
between
different businesses.
An asset is ordinarily
entered in the accounting
records at the price paid
to acquire it (i.e. at its
cost) and that this cost is
the
basis
for
all
subsequent
accounting
for the asset.
(5)Dual aspect
Assets= Capital
- Liabilities
Revenues
is In
general,
trading
generally
industries usually choose
recognized
to recognize revenue
when it had when
goods
are
been earned
delivered.
Example: When a trader
sends goods on sales or
return
basis
to
a
customer, no sales take
place until the customer
informs the seller that he
has decided to buy the
good
revenue Only revenue relevant to
(8) Matching All
earned in an an accounting period and
/other
accounting
expenses relevant to that
receivables
and
other period should be periods revenue are
matched against recognized.
payables
all costs and Example: Other payable
concept
expenses
and other receivable
incurred
in
generating
revenues
All accounting Once a company has
(9)
practices being decided on a certain
Consistency
used should be method of accounting for
consistent
a given class of events, it
within
one will use the same method
accounting
of accounting for all
period
to subsequent events of the
another.
same character unless it
has a sound reason to do
otherwise.
Example
applying
straight line method of
depreciation every year.
(7) Realisation
The
application
of
prudence concepts leads
to creation of secret or
undisclosed reserves (in
the form of provision)
(10)
Materiality
The treatment of
an item depends
on
its
importance and
relevance
(12)
Objectivity
(13)
Subjectivity
The use of a
method which
all can agree to.
There is no definitive
rule
that
separates
material from immaterial
information.
To be objective, one
must always follow the
rules or concepts of
accounting. It therefore
prevents the accountants
from using their own
judgments.
Everyone using The use of a method When
you
are The application of this
their
own based on ones own subjective, it means that concept may lead to a lot
different method judgment.
you want to use your of contradictions.
own
method
even
though no one else may
agree to it.