44066181 10 Accounting Concepts | Revenue | Expense

In order to maintain uniformity and consistency in preparing and maintaining boo ks of accounts, certain rules or principles have been

evolved. These rules/princ iples are classified as concepts and conventions. These are foundations of prepa ring and maintaining accounting records. In this lesson we shall learn about var ious accounting concepts, their meaning and significance. OBJECTIVES: After stud ying this lesson, you will be able to : y explain the term accounting concept; y explain the meaning and significance of various accounting concepts : Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duali ty Aspect concept, Realisation Concept, Accrual Concept and Matching Concept. ME ANING Let us take an example. In India there is a basic rule to be followed by e veryone that one should walk or drive on his/her left hand side of the road. It helps in the smooth flow of traffic. Similarly, there are certain rules that an accountant should follow while recording business transactions and preparing acc ounts. These may be termed as accounting concept. Thus, this can be said that : ³A ccounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts.´ The main objective is to maintain uniformity and consistency in accounting recor ds. These concepts constitute the very basis of accounting. All the concepts hav e been developed over the years from experience and thus they are universally ac cepted rules. Following are the various accounting concepts that have been discu ssed in the following sections : y y y y y y y y y Business entity concept Money measurement concept Going concern concept Accounting period concept Accounting cost concept Duality aspect concept Realisation concept Accrual concept Matching concept 1. BUSINESS ENTITY CONCEPT This concept assumes that, for accounting purposes, t he business enterprise and its owners are two separate independent entities. Thu s, the business and personal transactions of its owner are separate. For example , when the owner invests money in the business, it is recorded as liability of t he business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense. Thu s, the accounting records are made in the books of accounts from the point of vi ew of the business unit and not the person owning the business. This concept is the very basis of accounting. Let us take an example. Suppose Mr. Sahoo started business investing Rs100000. He purchased goods for Rs40000, Furniture for Rs200 00 and plant and machinery of Rs30000. Rs10000 remains in hand. These are the as sets of the business and not of the owner. According to the business entity conc ept Rs100000 will be treated by business as capital i.e. a liability of business towards the owner of the business.Now suppose, he takes away Rs5000 cash or goo ds worth Rs5000 for his domestic purposes. This withdrawal of cash/goods by the owner from the business is his

.private expense and not an expense of the business.10 lakhs.. the business entity concept states that business and the owner are two separ ate/distinct persons... Therefore.... office building of Rs.. an organisation may have a factor y on a piece of land measuring 10 acres. computers Rs. INTEXT QUESTIONS (01) Fill in the blanks with suitable word/words (i) The accounting concepts are basi c . that is in the currency of a country. It also facilitates the recording and reporting of business transactions from the business point of view It is the very basis of accounting concepts..... For example. the cost of factory land may be say Rs.. sincerity. But for accounting purposes they are to b e recorded in money terms i.e..... loyal ity..100000.. (ii) The main objective of accounting c oncepts is to maintain .. purchase of raw materials Rs.12 crore.10000 etc..... of accounting. raw material Rs.. Thus. In our country such transactions are in terms of rupees. (iv) The goods drawn from business for owner¶s personal use are called«««... concept assumes that business enterprise and its owners are two separate independent entities...30 lakhs. y It facilitates comparison of busi ness performance of two different periods of the same firm or of the two differe nt firms for the same period... But the transactions which cannot be expressed in monetar y terms are not recorded in the books of accounts.. as per the money measurement concept.... any expenses incurred by owner for himself or his family from business will be considered as expenses and it will be shown as drawings. This concept restraints accountants f rom recording of owner¶s private / personal transactions. 2... in rupees..22 crore and Rs. that too in terms of money and not in terms of the quantity..... conventions and principles. Significance: The following points highlight the significance of busi ness entity concept : y y y y This concept helps in ascertaining the profit of t he business as only the business expenses and revenues are recorded and all the private and personal expenses are ignored. 50 personal computers.42 lakhs..... the total a ssets of the organisation are valued at Rs... In this case. y If all the business t ransactions are expressed in monetary terms. and so they are recorded in the books of accounts... transactions which can be expressed in terms of money are recorded in the books of accounts.10 crore.. Another aspect of this concept is that the records of the transactions are to be kept not in the physical units but in the monetary u nit. sale of goods worth Rs.. in th e accounting record. the transactions which can be expressed in terms of money is recorded in the acc ounts books. honesty of employees are not recorded in books of accounts because these ca nnot be measured in terms of money although they do affect the profits and losse s of the business concern.... T hese are expressed in different units..200000. Rent Paid Rs. 100 kg of raw materials etc. (iii) . and .2 lakhs. For ex ample.... Accordingly.. Signif icance: The following points highlight the significance of money measurement con cept : y This concept guides accountants what to record and what not to record... at the end of the year 2006. INTEXT QUESTIONS (02) . Thus.... are expressed in terms of money. It is termed as Drawings........ it will be easy to understand the a ccounts prepared by the business enterprise. 50 office chairs and tables........... For example.... Th us. y It helps in recording business transactions uniformly.. office building containing 50 rooms. office chairs and tables Rs.. MONEY MEASUREMENT CONCE PT This concept assumes that all business transactions must be in terms of money ...

. market price) (iii) The concept that a business en terprise will not be closed down in the near future is known as «««««.... According to this concept every year some am ount will be shown as expenses and the balance amount as an asset... GOING CONCERN CONCEPT This concept states that a bu siness firm will continue to carry on its activities for an indefinite period of time... cash statement) (v) .. Business entity) 4.. this concept requires that a bal ance sheet and profit and loss account should be prepared at regular intervals.. y A business is judged for its cap acity to earn profits in future. money measurement concept) (iv) On the basis of going concern concept.. y It is of great help to the investors .10000 given as charity (v) Delay i n supply of raw materials 3. Further. This is an important assump tion of accounting. Simply stated. calculation of profit..... y This concept fac ilitates preparation of financial statements........ (for a defi nite time period.... if an a mount is spent on an item which will be used in business for many years. (financial statements. INTEXT QUESTIONS (03) Fill in the blanks by sel ecting correct words given in the bracket/brackets: (i) Going concern concept st ates that every business firm will continue to carry on its activities «««««... This is necessary for different purposes like... this concept assumes that. as it provides a basis for showing the value of assets in th e balance sheet. Thus. de preciation is charged on the fixed asset. Significance: The followin g points highlight the significance of going concern concept. Thus..... it will not be proper to charge the amount from the revenues of the year in which the i tem is acquired..Put a tick mark (Ö) against the information that should be recorded in the books o f accounts and cross mark (×) against the information that should not be recorded (i) Health of a managing director (ii) Purchase of factory building Rs. AC COUNTING PERIOD CONCEPT All the transactions are recorded in the books of accounts on the assumption tha t profits on these transactions are to be ascertained for a specified period. ascertaini ng financical position. bank stat ement. for an indefinite time period) (ii) Fixed assets are shown in the books at their «««««.. y In the absence of this concept. it assures them that they will continue to get income on their invest ments. Th is is known as accounting period concept. y On the basis of this concept. For example... the cost of a fixed asset will be treat ed as an expense in the year of its purchase. Thus. it will not be dissolved in the near future.. Only a part of the value is shown as expense in the year of pur chase and the remaining balance is shown as an asset.. (Going concern...... a company purchases a plant and machinery of Rs.. tax computation etc..10 crore (iii) Rent paid Rs. (cost price.. because... it means that every business entity has continuity of life .10 0000 and its life span is 10 years..100000 (iv) Goods worth Rs... indefinite life of business is divided . concept states that busin ess will not be dissolved in near future. (going concern con cept.. a b usiness prepares its .

(iii) According to accounting period concept. goods purchased and sold during the period. etc are recor ded in the books of accounts at a price paid for them. revenue and expenses are related to a ««««««. INTEXT QUESTIONS (0 4) Fill in the blanks with suitable word/words.000 were spent on transporting the machine to the factory site. one month. a machine wa s purchased by XYZ Limited for Rs. An amount of Rs. financial institutions.into parts. y It also hel ps banks. furniture. it is known as ««««««. These parts are known as Accounting Period. Rs. The effect of cost concept is tha t if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. For example. (ii) The commonly a ccepted accounting period in India is ««««««. Year that begi ns from 1st of January and ends on 31st of December. for manufacturing shoes.503000. period. creditors. But usually one year is taken as one ac counting period which may be a calender year or a financial year. concept. It mean s that fixed assets like building. salaries etc. y It also helps the business firms t o distribute their income at regular intervals as dividends. paid for the period are accounted for and against that period only. y It helps in calculating depreciation on fixed assets. The cost con cept is also known as historical cost concept. goodwill appears in the account s only if the entity has purchased this intangible asset for a price. (iv) If accounting year begins from 1s t of January. e. then accounting year is known as ««««««. is known as Calendar Year. s ix months. Significance: y It h elps in predicting the future prospects of the business. y It helps in calculati ng tax on business income calculated for a particular time period. Thus. it m ay be clarified that cost means original or acquisition cost only for new assets and for the used ones. Suppose the market pri ce of the same is now Rs 90000 it will not be shown at this value. 5. cost means original cost less depreciation. y The effect of cost concept is that if the busine ss entity does not pay anything for an asset.500000. transportation and installation and not at its market price. (v) If accounting year be gins from 1st of April and ends on 31st of March. is known as financial year. etc to assess and analyse the perfo rmance of business for a particular period. rent. This cost is also known as historical cost. Hence. and ends on 31st of December. which can be verified from the supporting documents. In addition . As per accounting period concept. (i) Recording of transactions in the books of accounts with a definite period is called ««««««. The year that begins from 1st of April and ends on 31st of March of the followin g year. all the tr ansactions are recorded in the books of accounts for a specified period of time. ACCOUNTING COST CONCEPT Accounting cost concept states that all assets are rec orded in the books of accounts at their purchase price.2000 were spent on its installation. plant and machinery. this item will not be shown in the books of accounts. Further. It may be of one year. three months. Rs. Significan ce: y This concept requires asset to be shown at the price it has been acquired. The total amount at which the machine will be recorded in the books of accounts would be the sum of all these items i. etc.1. INTEXT QUESTIONS (05) . which includes cost of a cquisition.

These two aspects are to be recorded. The implication of dual aspect concept is that every tr ansaction has an equal impact on assets and liabilities in such a way that total assets are always equal to total liabilities. Once the two aspects of a transaction are known. it becomes easy to apply the rules of accounting and maintain the records in the books of accounts properly. Therefore. (iii) The cost conce pt does not show the ««««. ncept.e. This claim is al so termed as capital or owners equity and that of outsiders. as liabilities or c reditors¶ equity. Rent paid in cash to the landlord The two aspe cts are (i) Payment of cash (ii) Rent (Expenses incurred). y It encourages the accountant to post each entry in opposite sides of t wo affected accounts INTEXT QUESTIONS (06) Write the two aspects (effects) of th e following transactions. documents. Thus. Capital brought in by the owner of the business The two aspects in this transaction are : (i) Receipt of cash ( ii) Increase in Capital (owners equity) 2. 6. goods p urchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. DUAL ASPECT CONCEPT Dual aspect is the foundation or basic principle o f accounting. For example.Fill in the blanks with suitable word/words (i) The cost concept states that all fixed assets are recorded in the books of accounts at their ««««. of the business. It means. the duality concept is commo nly expressed in terms of fundamental accounting equation : Assets = Liabilities + Capital The above accounting equation states that the assets of a business ar e always equal to the claims of owner/owners and the outsiders. Purchase of machinery by cheque The t wo aspects in the transaction are (i) Reduction in Bank Balance (ii) Owning of M achinery 3. (ii) The main objective to adopt historical cost in recording the fixed assets is that the cos t of the assets will be easily verifiable from the ««««. . Let us analyse some more business transactions in terms of their dual aspect : 1. both the aspects of the transaction must be recorded in the books of accounts. Goods sold for cash The two aspects are (i) Receipt of cash (ii) Del ivery of goods to the customer 4. The interpretation of t he Dual aspect concept is that every transaction has an equal effect on assets a nd liabilities in such a way that total assets are always equal to total liabili ties of the business. Significance: y This concept helps accountant in detecting error. (iv) The cost concept is otherwise known as ««««. price. i. it affects two accounts in their respective opposite sides. The knowledge of dual aspect helps in identifying the two aspect s of a transaction which helps in applying the rules of recording the transactio ns in books of accounts. the transaction should be recorded at two places. It provides the very basis of recording business transactions in t he books of accounts. This concept assumes that every transaction has a dual eff ect.

1. In short.00. In the abo ve examples. while all the good s of Rs.000 is received in the year 2006.20.4.00. (ii) Bansal sold goods f or Rs. it can be said that : Revenue is said to have be en realised when cash has been received or right to receive cash on the sale of goods or services or both has been created. Revenue became due in the year 2005 itself.000 in 2006. INTEXT QUESTIONS (07) Ascertain the amount of current revenue r ealized for the year ending 31st December 2006 (i) An order. (iv) What will be the revenue i f an advance payment of Rs. Though cash is received or not received and the expe nses are recognized when they become payable though cash is paid or not paid. Jeweler received an order to supply gold ornaments worth Rs.100. (ii) The reve nue for Bansal for year 2005 is Rs. (ii) What will be the revenue (i) if the payment of Rs. It means that revenues are recognised w hen they become receivable.000 is received in the year 2006 and the balance received in the year 2007.00.000 during the year endin g 31 December 2005.00.1500000 is received in the year 2007. Th ey supplied ornaments worth Rs.200000 up to the year ending 31st December 2005 a nd rest of the ornaments were supplied in January 2006.000 recei ved in 2007. let us analyse the above examples to ascertain the co rrect amount of revenue realised for the year ending 31st December 2005.P.Let us study the following examples : (i) N.10. 1 2 3 4 5 6 7 8 9 10 Transaction Owner brings cash in business Goods purchased for cash Goods sold fo r cash Furniture purchased for cash Received cash from Sharma Purchased machine from Rama on credit Paid to Ram Salaries Paid Rent Paid Rent Received Ist Aspect IInd Aspects 7. The term realisation means creation of legal right to receive money. (iii) Akshay¶s revenu e for the year 2005 is Rs. Bo th transactions will be recorded in the accounting period to which they relate.No. Therefore. Now. Selling good is realisation. the realisation occurs when the goods and services have been sold either for cash or on credit.6 . The goods have been supplied only fo r Rs.000 for cash in 2006 and the goods have been delivered during the sam e year.L.P. 8.000.000 is received in cash in 2006 and the balance payment of Rs.1.00.00. Jeweller is Rs. (i) The revenue for the year 2005 for N.000 as the goods have been delivered in the year 2005. In other words.000 are supplied in the year 2006. st (iii) Akshay sold goods on credit for Rs.200000. receivin g order is not.50. Significance: y It helps in making the accounting information more objective. It also refers t o inflow of assets in the form of receivable. Mere getting an order is not considered as revenue until the goods have been delivered. y It provides that the transactions should be recorded only when goods are deliver ed to the buyer. REALISATION CONCEPT This concept states that revenue from any business transaction should be include d in the accounting records only when it is realised.S. The goods have been delivered in 2005 but the payment was re ceived in March 2006.50. because the goods have been delivered to the c ustomer in the year 2005.500000. revenue is realized when the goods are delivered to the customers. (iii) What will be the revenue if the goods have been sold on credi t and the payment of Rs. ACCRUAL CONCEPT The meaning of accrual is somethin g that becomes due especially an amount of money that is yet to be paid or recei ved at the end of the accounting period.20. the accrual concept makes a distinction between the accrual . The concept of realisation states that revenue is realized at the time when good s or services are actually delivered. Cash has also been received in the same year.00. to supply goods for Rs.

INTEXT QUESTIONS (08) Fill in the blanks with suitable wor d/words : (i) Accrual concept relates to the determination of .20 (vii) Postage Rs. Significance: y It helps in knowing actual expenses and act ual income during a particular time period.1000 (ii) Salaries Paid Rs.... Commission 3. .. In brief.20000 on 29th March 2005 but th e payment is made on 2nd April 2005 the accrual concept requires that expenses m ust be recorded for the year ending 31st March 2005 although no payment has been made until 31st March 2005 though the service has been received and the person to whom the payment should have been made is shown as creditor. Interest received 3.. Let us study the following trans actions of a business during the month of December.. Similarly... Fo r example.... ( iii) Accrual concept requires revenue is recognised when . y It helps in calculating the net pr ofit of the business......200. accrua l concept requires that revenue is recognised when realized and expenses are rec ognised when they become due and payable without regard to the time of cash rece ipt or cash payment... Rent paid 200 Less for 2005 (50) 6. out of which Rs......50000 are sold on 25th March 2006 but payment is received on 10th April 2006.e....30 (viii) Rent paid Rs .. For example... Salaries Amount 350 Revenue 1.... Rent received 140 Less fo r 2007 (40) Amount 2. It will be a revenue for the year ending .. Good s purchased Cash 1500 Credit 500 7.200 Let u s record the above transactions under the heading of Expenses and Revenue. Depreciation on machine 150 20 30 150 2000 200 3000 50 100 .40 received fo r the year 2007 (vi) Carriage paid Rs...... 2006 (i) Sale : cash Rs. Postage 5..140... MATCHING CONCEP T The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period... 25th March 2005....50 (v) Rent received Rs...1500 and on credit Rs..50 belong to the year 2005 (ix) Goods purchased in the yea r for cash Rs.. The accrual concept under accounting assumes that revenue is realised at the time of sale of goods o r services irrespective of the fact when the cash is received.. a fi rm sells goods for Rs 55000 on 25th March 2005 and the payment is not received u ntil 10th April 2005... It must be included in the revenue for the year ending 31st March 2005.500 (x) Depreciation on machine Rs...350 (iii) Commission Paid Rs. irrespective of the fact when actual payment for these services are made.... the next step is to allocate it to the relevant accounting period.. So once the revenue is realised... (ii) Goods of Rs... if the firm received goods costing Rs. out of which Rs.... and expenses are recognised when they become . Thi s can be done with the help of accrual concept.2000 and credit Rs.. Carriage 4.... Sales Cash 2000 Credit 1000 2. 9. Expenses 1. expenses are recognised at the time services provid ed.150 (iv) Interest Received Rs. the amount is due and payable to the firm on the date of s ale i...receipt of cash and the right to receive cash as regards revenue and actual paym ent of cash and obligation to pay cash as regards expenses.

. If the rev enue is more than the expenses.... 2... y It is very helpful for the investors/sharehol ders to know the exact amount of profit or loss of the business. y Dual aspect concept states that every transaction has a dual e ffect. This is what exactly has been done by applying the matching concept. oncept states that the revenue and the expenses incurred to earn the revenue mus t belong to the same accounting period (vi) ««. (iv) Income is the excess of ««. y The i mportant accounting concepts are business entity.. concept states how the expenses sh ould be compared with revenues for ascertaining exact profit or loss for a parti cular period.««. y Realisation concept states that revenue from any business transaction s hould be included in the accounting records only when it is realised y Matching concept states that the revenue and the expenses incurred to earn the revenue mu st belong to the same accounting period TERMINAL QUESTIONS 1. INTEXT QUESTION S (09) Fill in the blanks with suitable word/words : (i) Expenses are matched wi th ««. ( ) Salaries paid is an example of ««. WHAT YOU HAVE LEARNT y Accounting concept refers to the basic assu mptions which serve the basis of recording actual business transactions. y Going concern conc ept states that a business firm will continue to carry on activities for an inde finite period of time. accrual concept... over ««. the matching concept implies that all revenues ear ned during an accounting year. realisation concept .. Significance: y It guid es how the expenses should be matched with revenue for determining exact profit or loss for a particular period.««. whether paid/not paid during the year should be taken into account while ascertaining profit or loss for that year. What do you mean by business entity concept? .. it is called profit. y Business entity concept assumes that f or accounting purposes. money measurement.««.. going conce rn. an matching concept. cost concept..315 0-Expenses Rs. y Accounting period concept states that all the business transactions are recorded in the books of accounts on the assumption that profit s of transactions is to be ascertained for a specified time period..250. (ii) Goods sold for cash is an example of ««.««. Explain meaning an d significance of going concern concept. y Money measurement concept assumes that all business transactions m ust be recorded in the books of accounts in terms of money. y Accounting cost concept states that all assets are recorded in the books of accounts at th eir cost price. accounting period. the business enterprise and its owner(s) are two separat e entities. whether received/not received during that year an d all cost incurred.e (Revenue Rs. Therefore.Total 2900 Totalo 3150 In the above example expenses have been matched with revenue i... duality aspect concept. If the expenses are more th an revenue it is called loss..««..2900) This comparison has resulted in profit of Rs. generated during a period.

10. rent Intext Question 7 (i) Rs.000 00 (iii) Rs. State meaning and significance of money measurement concept.00.1.000 Intext Question 8 (i) income (ii) 31st Mar ch.20.3. expenses (v) matching (vi) matching . cash (ix) Rent. Sharma (vi) Machine. ANSWERS TO INTEXT QUESTIONS Intext Questions 1 (i ) rules (ii) uniformity and consistency (iii) Business entity concept (iv) drawi ngs Intext Question 2 (i) × (ii) (iii) (iv) (v) × Intext Question 3 (i) for an indef inite time period (ii) cost price (iii) going concern concept (iv) financial sta tements (v) Going concern Intext Question 4 (i) accounting period (ii) one year (iii) particular (iv) calender year Intext Question 5 (i) purchase (ii) supporti ng (iii) true net worth (iv) historical cost Intext Question 6 (i) Owner¶s capital .000 (ii) Rs. cash (x) Cash. 4.00000 (iv) Rs. Rama (vii) Ram. cash (iii) Cash received. goods sold (iv) Furniture. cash (viii) Salaries. due Intext Question 9 (i) revenue (ii) revenue (iii) ex pense (iv) revenue.00. cash (v) Cash. 2006 (iii) realised.10. Write short n otes on the following (a) Cost concept (b) Accrual concept (c) Matching concept (d) Accounting period concept 5. cash (ii) Goods received. What do you mean by accounting concept? Explain any four accounting concepts.

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.