CHAPTER - ONE

INTRODUCTION

1.1 Introduction
Accounting Concept defines the assumptions on the basis of which Financial Statements of a
business entity are prepared. Certain concepts are received assumed and accepted in
accounting to provide a unifying structure and internal logic to accounting process. The word
concept means idea or nation, which has universal application. Financial transactions are
interpreted in the light of the concepts, which govern accounting methods. Concepts are those
basis assumption and conditions, which form the basis upon which the accountancy has been
laid. Unlike physical science, Accounting concepts are only results of broad consensus. These
accounting concepts lay the foundation on the basis of which the accounting principles are
formulated.

The course accounting concepts and practices is intended to supply students with a
comprehensive introduction to accounting and will alter students to describe the character,
purpose and performance of accounting. It aims to comprehend the method within which
accounting transactions are measured, recorded and recognized for various kinds of business
organizations. The concepts learned during the curriculum will regulate and abstract
frameworks applied to accounting. Moreover it perceives the role of accounting data within
the effective monetary management of business organizations.

To know accounts, it is necessary to follow the principles of accounts. These principles are
golden rules upon which a company runs its financial segment. Accounting principles change
from time to time and for a student of commerce, it is necessary to know what the changes
are. You can also say that accounting principles are a set of certain conventions that have
been generated to maintain an exact framework for reporting in finance. Accounting concepts
and principles homework help say that, financial informations shall never be misleading and
should always be corrected from the accountants.

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1.2 Origin of the Report
The Term paper is a basic requirement for the MBA program. The proposed topic is
Application and Limitation of Basic Accounting Concept. The topic is assigned by
Muhammad Burhan Uddin FCMA, Assistant Professor, Department of Accounting,
Victoria Govt. College, Comilla.

1.3 Objectives of the Study

The major objectives of the Accounting Concepts are :

General Objectives
The main objectives of the study are to gather knowledge about the accounting concept used
in Bangladesh and all over the world.

Specific Objectives
This report also covers the following objectives

After studying this lesson, we will be able to:

Explain the term of accounting concept;
To ascertain the operating results of the enterprise;
To reveal the financial position of the business; and
To enable control over the operation as well as the resources of the business.
Explain the meaning and significance of various accounting concepts: Business Entity,
Money Measurement, Going Concern, Accounting Period, Cost Concept, and Duality
Aspect concept, Realization Concept, Accrual Concept and Matching Concept.

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 CHAPTER - TWO
CONCEPTUAL ISSUE

2.1 Meaning of Accounting Concept

Accounting Concepts and Principles are a set of broad conventions that have actually been
developed to supply a fundamental structure for monetary reporting. As monetary reporting
includes substantial expert judgments by accounting professionals, these principles and
concepts make sure that the users of monetary info are not misinformed by the adoption of
accounting policies and practices that break the spirit of the accountancy occupation.
Accounting professionals should for that reason actively think about whether the accounting
treatments embraced follow the accounting concepts and principles.

In case where application of one accounting principle or concept leads to a dispute with
another accounting idea or concept, accounting professionals need to consider exactly what is
finest for the users of the monetary details. Whether dependability of details might be
jeopardized to make sure significance of details is a matter of judgment that ought to be
thought about in the interest of the users of the monetary info.

Accounting principles are the foundation for GAAP. All the concepts and requirements in
GAAP can be traced back to the hidden accounting principles. Some accounting principles
originate from long-used accounting practices where as others originate from ruling making
bodies like the FASB.

Accounting follows a particular structure of core principles makings the details produced
through an accounting system important. Without these core principles accounting would be
undependable and unimportant.

These principles are the foundation that forms the basis of more complex and specialized
principles called GAAP or normally accepted Accounting Concepts and Principles such as
the International Financial Reporting Standards, United States GAAP and so on. They handle
matters like accounting for profits, accounting for earnings taxes, representing company
mixes, and so on.

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2.2 Literature Review
Accounting is called the language of company that which interacts the monetary condition
and efficiency of a company to interested users, likewise described as stakeholders.

In order to end up being reliable in performing the Accounting Concepts and Principles
treatment, in addition to interacting the monetary info of business, there is an extensively
accepted set of guidelines, concepts and principles that governs the application of the
accounting treatments and it is described as the Generally Accepted Accounting Principles or
GAAP.

It is needed to follow typically accepted accounting principles in the preparation of those

declarations if a business disperses its monetary declarations to the public. Even more, if a
businesss stock is openly traded, federal law needs the businesss monetary declarations to
be investigated by independent accountant. Both the businesss management and the
independent accounting professionals should license that the monetary declarations and the
associated notes to the monetary declarations have actually been prepared in accordance with
GAAP.

Due to the fact that of typically accepted accounting principles we are able to presume that
there is consistency from year to year in the approaches utilized to prepare a businesss
monetary declarations. Over the years the typically accepted accounting principles have
actually ended up being more complicated since monetary deals have actually ended up being
more complicated.

The essential or standard principles in accounting are the expense concept, complete
disclosure concept, matching concept, earnings acknowledgment concept, financial entity
presumption, financial system presumption, time duration presumption, going issue
conservatism, presumption, and materiality. (My factor is that accounting principles likewise
consist of the declarations of monetary accounting requirements and the analyses released by
the Financial Accounting Standards Board and its predecessors, as well as market practices.).

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 CHAPTER - THREE
DATABASE

3.1 Scope of the Study

Concepts are those basis assumption and conditions, which form the basis upon which the
accountancy has been laid. Unlike physical science, Accounting concepts are only results of
broad consensus. These accounting concepts lay the foundation on the basis of which the
accounting principles are formulated. The course accounting concepts and practices is
intended to supply students with a comprehensive introduction to accounting and will alter
students to describe the character, purpose and performance of accounting.

3.2 Methodology of the study

Methods followed to perform a job or conducting activities to complete a task is called
methodology. In conducting this report the following methodology will be adopted in data &
information collection, preparation of reports etc.

Data Collection
The data and information used to prepare this report are mainly collected from secondary
sources. The use of primary sources of information are limited and used for analyzing.

Secondary Sources
Useful Accounting books
Different websites.
Blogs of different writer.

3.3 Limitations of the Study

The presented study was not out of limitations. But it was a great opportunity for us to know
the accounting concept used in Bangladesh & all over the world. The study carried on has the
following limitations:

Lack of information to collect.

Different information in different websites.
Lack of published materials.

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 Some problems create confusions regarding verification of data.
Lack of knowledge and experience among the members who prepared this report. The
time is insufficient to know all activities to complete.
Lack of time to gather whole information.
Lack of experience to make a proper assignment on basic accounting concept.

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 CHAPTER - FOUR
FINDING & ANALYSIS

4.1 Application of Accounting Concept

Accounting 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 records. These concepts constitute the
very basis of accounting. All the concepts have been developed over the years from
experience and thus they are universally accepted rules. Following are the various accounting
concepts that have been discussed in the following sections:
Business Entity Concept
Money Measurement Concept
Going Concern Concept
Accounting Period Concept
Accounting Cost Concept
Duality Aspect Concept
Realization Concept
Accrual Concept
Matching Concept
Verifiability & Objectivity Evidence Concept
Full Disclosure Concept
Materiality Concept
Conservatism Concept

4.1.1 Business Entity Concept

This concept assumes that, for accounting purposes, the business enterprise and its owners
are two separate independent entities. Thus, 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 the 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. Thus,
the accounting records are made in the books of accounts from the point of view of the
business unit and not the person owning the business. This concept is the very basis of
accounting.

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Let us take an example. Suppose Mr. Santo started business investing Tk 100000. He
purchased goods for Tk 40000, Furniture for Tk. 20000 and plant and machinery of Tk.
30000. Tk. 10000 remains in hand. These are the assets of the business and not of the owner.
According to the business entity concept Tk. 100000 will be treated by business as capital i.e.
a liability of business towards the owner of the business.

Now suppose, he takes away Tk. 5000 cash or goods worth Tk. 5000 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. It is termed as Drawings. Thus, the business
entity concept states that business and the owner are two separate/distinct persons.
Accordingly, any expenses incurred by owner for himself or his family from business will be
considered as expenses and it will be shown as drawings.

Significance
The following points highlight the significance of business entity concept:
This concept helps in ascertaining the profit of the business as only the business
expenses and revenues are recorded and all the private and personal expenses are
ignored.
These concept restraints accountants from recording of owners private/personal
transactions.
It also facilitates the recording and reporting of business transactions from the
business point of view
It is the very basis of accounting concepts, conventions and principles.

4.1.2 Money Measurement Concept

This concept assumes that all business transactions must be in terms of money that is in the
currency of a country. In our country such transactions are in terms of rupees. Thus, as per
the money measurement concept, transactions which can be expressed in terms of money are
recorded in the books of accounts. For example, sale of goods worth Tk..200000, purchase of
raw materials Tk.100000, Rent Paid Tk.10000 etc. are expressed in terms of money, and so
they are recorded in the books of accounts. But the transactions which cannot be expressed in
monetary terms are not recorded in the books of accounts. For example, sincerity, loyality,
honesty of employees are not recorded in books of accounts because these cannot be

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measured in terms of money although they do affect the profits and losses of the business
concern.

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 unit. For example, at the end of the year 2006, an
organisation may have a factory on a piece of land measuring 10 acres, office building
containing 50 rooms, 50 personal computers, 50 office chairs and tables, 100 kg of raw
materials etc. These are expressed in different units. But for accounting purposes they are to
be recorded in money terms i.e. in rupees.

In this case, the cost of factory land may be say Tk.12 crore, office building of Tk.10 crore,
computers Tk.10 lakhs, office chairs and tables Tk.2 lakhs, raw material Tk.30 lakhs. Thus,
the total assets of the organisation are valued at Tk.22 crore and Tk.42 lakhs. Therefore, the
transactions which can be expressed in terms of money is recorded in the accounts books, that
too in terms of money and not in terms of the quantity.

Significance
The following points highlight the significance of money measurement concept:
This concept guides accountants what to record and what not to record.
It helps in recording business transactions uniformly.
If all the business transactions are expressed in monetary terms, it will be easy to
understand the accounts prepared by the business enterprise.
It facilitates comparison of business performance of two different periods of the same
firm or of the two different firms for the same period.

4.1.3 Going Concern Concept

This concept states that a business firm will continue to carry on its activities for an indefinite
period of time. Simply stated, it means that every business entity has continuity of life. Thus,
it will not be dissolved in the near future. This is an important assumption of accounting, as it
provides a basis for showing the value of assets in the balance sheet; For example, a company
purchases a plant and machinery of Tk.100000 and its life span is 10 years. According to this
concept every year some amount will be shown as expenses and the balance amount as an
asset. Thus, if an amount is spent on an item which will be used in business for many years, it
will not be proper to charge the amount from the revenues of the year in which the item is
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acquired. Only a part of the value is shown as expense in the year of purchase and the
remaining balance is shown as an asset.

Significance
The following points highlight the significance of going concern concept;
This concept facilitates preparation of financial statements.
On the basis of this concept, depreciation is charged on the fixed asset.
It is of great help to the investors, because, it assures them that they will continue to
get income on their investments.
In the absence of this concept, the cost of a fixed asset will be treated as an expense in
the year of its purchase.
A business is judged for its capacity to earn profits in future.

4.1.4. Accounting Period Concept

All the transactions are recorded in the books of accounts on the assumption that profits on
these transactions are to be ascertained for a specified period. This is known as accounting
period concept. Thus, this concept requires that a balance sheet and profit and loss account
should be prepared at regular intervals. This is necessary for different purposes like,
calculation of profit, ascertaining financial position, tax computation etc.

Further, this concept assumes that, indefinite life of business is divided into parts. These parts
are known as Accounting Period. It may be of one year, six months, three months, one
month, etc. But usually one year is taken as one accounting period which may be a calendar
year or a financial year. Year that begins from 1st of January and ends on 31st of December
is known as Calendar Year. The year that begins from 1st of April and ends on 31st of March
of the following year is known as financial year. As per accounting period concept, all the
transactions are recorded in the books of accounts for a specified period of time. Hence,
goods purchased and sold during the period, rent, salaries etc. paid for the period are
accounted for and against that period only.

Significance
It helps in predicting the future prospects of the business.
It helps in calculating tax on business income calculated for a particular time period.

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 It also helps banks, financial institutions, creditors, etc to assess and analyze the
performance of business for a particular period.
It also helps the business firms to distribute their income at regular intervals as
dividends.

4.1.5 Accounting Cost Concept

Accounting cost concept states that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation and installation and not at
its market price. It means that fixed assets like building, plant and machinery, furniture, etc
are recorded in the books of accounts at a price paid for them.

For example, a machine was purchased by XYZ Limited for Tk.500000, for manufacturing
shoes. An amount of Tk.1,000 were spent on transporting the machine to the factory site. In
addition, Tk.2000 were spent on its installation. The total amount at which the machine will
be recorded in the books of accounts would be the sum of all these items i.e. Tk.503000. This
cost is also known as historical cost. Suppose the market price of the same is now Tk 90000 it
will not be shown at this value.

Further, it may be clarified that cost means original or acquisition cost only for new assets
and for the used ones, cost means original cost less depreciation. The cost concept is also
known as historical cost concept. The effect of cost concept is that if the business entity does
not pay anything for acquiring an asset this item would not appear in the books of accounts.
Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset
for a price.

Significance
This concept requires asset to be shown at the price it has been acquired, which can be
verified from the supporting documents.
It helps in calculating depreciation on fixed assets.
The effect of cost concept is that if the business entity does not pay anything for an
asset, this item will not be shown in the books of accounts.

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4.1.6 Dual Aspect Concept
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of
recording business transactions in the books of accounts. This concept assumes that every
transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides.
Therefore, the transaction should be recorded at two places. It means, both the aspects of the
transaction must be recorded in the books of accounts. For example, goods purchased for
cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects
are to be recorded.

Thus, the duality concept is commonly expressed in terms of fundamental accounting

equation:
Assets = Liabilities + Capital

The above accounting equation states that the assets of a business are always equal to the
claims of owner/owners and the outsiders. This claim is also termed as capital or owners
equity and that of outsiders, as liabilities or creditors equity. The knowledge of dual aspect
helps in identifying the two aspects of a transaction which helps in applying the rules of
recording the transactions in books of accounts. The implication of dual aspect concept is that
every transaction 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. The interpretation of
the Dual aspect concept is that every transaction has an equal effect on assets and liabilities in
such a way that total assets are always equal to total liabilities of the business.

Significance
This concept helps accountant in detecting error.
It encourages the accountant to post each entry in opposite sides of two affected
accounts.

4.1.7 Realization Concept

This concept states that revenue from any business transaction should be included in the
accounting records only when it is realized. The term realization means creation of legal right
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to receive money. Selling goods is realization, receiving order is not. In other words, it can be
said that: Revenue is said to have been realized when cash has been received or right to
receive cash on the sale of goods or services or both has been created.

Let us study the following examples:

(i) N.P. Jeweler received an order to supply gold ornaments worth Tk.500000. They supplied
ornaments worth Tk.200000 up to the year ending 31st December 2015 and rest of the
ornaments was supplied in January 2016.

(ii) Bansal sold goods for Tk.1,00,000 for cash in 2016 and the goods have been delivered
during the same year.

(iii) Akshay sold goods on credit for Tk.50,000 during the year ending 31st December 2015.
The goods have been delivered in 2015 but the payment was received in March 2016.

Now, let us analyze the above examples to ascertain the correct amount of revenue realized
for the year ending 31st December 2015.
(i) The revenue for the year 2015 for N.P. Jeweler is Tk.200000. Mere getting an order is not
considered as revenue until the goods have been delivered.

(ii) The revenue for Bansal for year 2015 is Tk.1,00,000 as the goods have been delivered in
the year 2015. Cash has also been received in the same year.

(iii) Akshays revenue for the year 2015 is Tk.50,000, because the goods have been delivered
to the customer in the year 2015. Revenue became due in the year 2015 itself. In the above
examples, revenue is realized when the goods are delivered to the customers. The concept of
realization states that revenue is realized at the time when goods or services are actually
delivered.

In short, the realization occurs when the goods and services have been sold either for cash or
on credit. It also refers to inflow of assets in the form of receivables.

Significance
It helps in making the accounting information more objective.
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 It provides that the transactions should be recorded only when goods are delivered to
the buyer.

4.1.8 Accrual Concept

The meaning of accrual is something that becomes due especially an amount of money that is
yet to be paid or received at the end of the accounting period. It means that revenues are
recognized when they become receivable. Though cash is received or not received and the
expenses are recognized when they become payable though cash is paid or not paid. Both
transactions will be recorded in the accounting period to which they relate. Therefore, the
accrual concept makes a distinction between the accrual receipt of cash and the right to
receive cash as regards revenue and actual payment of cash and obligation to pay cash as
regards expenses.

The accrual concept under accounting assumes that revenue is realized at the time of sale of
goods or services irrespective of the fact when the cash is received. For example, a firm sells
goods for Tk. 55000 on 25th March 2015 and the payment is not received until 10th April
2015, the amount is due and payable to the firm on the date of sale i.e. 25th March 2015. It
must be included in the revenue for the year ending 31st March 2015. Similarly, expenses are
recognized at the time services provided, irrespective of the fact when actual payment for
these services is made.

For example, if the firm received goods costing Tk.20000 on 29th March 2015 but the
payment is made on 2nd April 2015 the accrual concept requires that expenses must be
recorded for the year ending 31st March 2015 although no payment has been made until 31st
March 2015 though the service has been received and the person to whom the payment
should have been made is shown as creditor.

In brief, accrual concept requires that revenue is recognized when realized and expenses are
recognized when they become due and payable without regard to the time of cash receipt or
cash payment.

Significance
It helps in knowing actual expenses and actual income during a particular time period.
It helps in calculating the net profit of the business.
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4.1.9 Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the revenues
must belong to the same accounting period. So once the revenue is realized, the next step is to
allocate it to the relevant accounting period. This can be done with the help of accrual
concept. Let us study the following transactions of a business during the month of December,
2016
(i) Sale: cash Tk.2000 and credit Tk.1000
(ii) Salaries Paid Tk.350
(iii) Commission Paid Tk.150
(iv) Interest Received Tk.50
(v) Rent received Tk.140, out of which Tk.40 received for the year 2017
(vi) Carriage paid Tk.20
(vii) Postage Tk.30
(viii) Rent paid Tk.200; out of which Tk.50 belong to the year 2015
(ix) Goods purchased in the year for cash Tk.1500 and on credit Tk.500
(x) Depreciation on machine Tk.200

Let us record the above transactions under the heading of Expenses and Revenue.
Expense Amount Revenue Amount
Tk. Tk.
1. Salaries 350 1. Sales
2. Commission 150 Cash 2000
3. Carriage 20 Credit 1000 3000
4. Postage 30 2.Interest received 50
5. Rent paid 200 150 3. Rent received
Less for 2015 (50) 140 100
6. Goods purchased Less for 2017
Cash 1500 (40)
Credit 500 2000
7.Depreciation on machine 200
Total 2900 3150

Total

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In the above example expenses have been matched with revenue i.e (Revenue Tk.3150-
Expenses Tk.2900) this comparison has resulted in profit of Tk.250. If the revenue is more
than the expenses, it is called profit. If the expenses are more than revenue it is called loss.
This is what exactly has been done by applying the matching concept. Therefore, the
matching concept implies that all revenues earned during an accounting year, whether
received/not received during that year and all cost incurred, whether paid/not paid during the
year should be taken into account while ascertaining profit or loss for that year.

Significance
It guides how the expenses should be matched with revenue for determining exact
profit or loss for a particular period.
It is very helpful for the investors/shareholders to know the exact amount of profit or
loss of the business.

4.1.10 Verifiability & Objectivity Evidence Concept

This principle proposes that every accounting entry in the books should be verifiable against
evidences like vouchers, cash memos, cheques etc. In other words, if there is a certain
quantity of goods purchased, it should be verified against the cash memo for the quantity,
quality and price mentioned therein. The evidence showing the validity of a business
transaction should be objective enough.

In other words, the evidence should state the facts as they are, without a bias towards either
side. In addition, the supporting documents like invoices, memos, and cheques provide the
basis for making accounting entries and for later audit of accounts. However, every
accounting entry is not subject to verification; also the same is neither possible nor feasible,
To sum up, it can be said that this principle holds that accounting should be free from
personal bias.

Significance
The verifiability and objectivity in accounts support the thought that books and accounts
show true and fair view of the business concern. This principle also serves as the base for
adoption of Historical Cost, as assets are recorded at their cost price instead of market value
and this cost price can be verified from the books of accounts, if those transactions are duly
supported with the documentary evidences.
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4.1.11 Full Disclosure Concept
The principle of full disclosure directs a business enterprise towards disclosing the full, fair
and sufficient information. Since one of the primary objectives of accounting is to
communicate with the intended users, full disclosure in the financial statements and
accompanying footnotes acts as a means of communicating all relevant, material and reliable
information to them. Stated differently, no information of substance should be concealed in
the financial statements. The users here can be both internal and external.

For instance, top level management requires information for planning, for which it requires
internal papers like production reports, cash budget report etc. Similarly, external users like
banks, creditors etc have to rely on financial statements as the source of information.

In this connection, certain regulatory authorities have made innumerable strict clauses for the
disclosure of essential information through financial statements and reports. For example,
Security Exchange Board of India (SEBI) has made it compulsory for certain types of
companies to annex Corporate Governance Report in the annual report showing their
financial results.

Similarly, Companies Act has made it compulsory for all the companies to use the formats
provided by it for the preparation of Profit and Loss Account and Balance Sheet, including
complete details regarding the items to be included and their placement including the
contents of foot notes.

This shows that disclosure of all material facts is compulsory but it does not imply that even
those figures which are irrelevant are to be included in financial statements. It just requires all
the material information i.e. any fact or figure which has the capacity of altering the decisions
of users, associated with the enterprise, and must be conveyed in an organized and reliable
manner.

Significance
Information contained in the financial statements is used by various users such as investors,
management, lenders, creditors and others for taking various decisions pertaining to them. In
this context it becomes more important to disclose all material facts relating to the financial
performance of a business enterprise fully in their financial statements and their
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accompanying footnotes to enable them to take decisions about profitability and financial
soundness about the business enterprise.

4.1.12 Materiality Concept

As per full disclosure concept each and every aspect related to business enterprise should be
fully disclosed in the financial statements but sometimes it is not possible to disclose all the
information. In this context materiality requires that accounting should focus on material
facts and efforts should not be wasted in presenting the facts which are not so important or
immaterial.

In this connection one important question arises -What is material? It may happen that one
fact is material for someone but not for others and vice versa. If any fact or figure has the
capacity of changing or varying the decision of any intended users viz., owner, management,
creditors etc., it is said to be a material fact.

Hence, the immaterial items are to be merged with other items. Irrelevant items can
sometimes be left out from recording. But the decision whether the transaction fact or figure
is material or not should be taken with due care and utmost diligence. In this connection one
should put oneself in others shoes and try to understand how relevant that information for
one is.

For instance, variation in the amount of profits of two consecutive years due to change in
depreciation policy, inventory valuation, abnormal circumstances like lockouts, earthquake
etc. are material. However, decrease in sales due to less demand is irrelevant.

Significance
Material information in the financial statements helps the intended users to take decision
relating to their interest. Containing only material information in the financial statements
does not overburden the financial statements. The major limitation of this concept is that
there is no consistency about the meaning of material. Sometimes it may happen that one fact
is material for someone but immaterial for others and vice versa.

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4.1.13 Conservatism Concept
The convention of conservatism, also known as prudence, is based on the policy of playing
safe. Accordingly, all anticipated profits should be ignored but all anticipated losses should
be accounted for. The convention requires that profits in anticipation should not be recorded
but losses in anticipation should immediately be recorded even if there is a very remote
possibility of occurrence of such losses.

This convention is based on the rule that anticipate no profits but provide for all possible
losses. Thus, a cautious approach should be adopted in ascertaining the income of the
business entity with the objective that profits of the enterprise in no case be overstated. The
overstatement of profits may lead to distribution of excess dividend, resultant reduction in
capital of the business enterprise.

When there is more than one equally acceptable method available, the method which is
nearer to conservative approach should be adopted. It is because of this that conservatism is
also called prudence principle so that the rational application of the same could be possible in
circumstances of uncertainty and doubt.

In the same parlance, business entities are required to:

(i) Value stock at cost or realizable value whichever is lower;

(ii) Create provision for doubtful debts;

(iii) Create provision for discount on debtors;

(iv) Ignore the provision for discount on creditors;

(v) Create investment fluctuation reserve;

(vi) Show the joint life policy at its surrender value on the asset side of the balance sheet;

(vii) Write off intangible assets like goodwill, trademark, and patents as early as possible.

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Significance
The convention of conservatism is a pessimist approach in accounting, but for dealing with
the uncertainties it is a must. In this way interests of lenders and creditors are also protected
by not distributing fictitious profits as dividends.

4.2 Accounting Concepts in a Diagram

This is a diagram of details for principles, concepts, and constraints within the field of
Financial Accounting.

Going Concern, unless there is evidence to the contrary, it is assumed that a business
will continue to trade normally for the foreseeable future.
Accruals and Matching, revenue earned must be matched against expenditure when it
was incurred
Prudence, if there are two acceptable accounting procedures choose the one gives the
less optimistic view of profitability and asset values.
Consistency, similar items should be accorded similar accounting treatments.
Entity, a business is an entity distinct from its owners.
Money Measurement, accounts only deal with items to which monetary values can be
attributed.
Separate Valuation each asset or liability must be valued separately.
Materiality, only items material in amount or in their nature will affect the true and
fair view given by a set of accounts.
Historical Cost, Transactions are recorded at the cost when they occurred.
Realization, revenue and profits are recognized when realized.
Duality, every transaction has two effects.

4.3 Importance of Accounting Concept

It is very much important to maintain the concepts because going against the principles will
lead you to disastrous results. Whenever you are given such projects and assignments, make
sure that the sums that you do shall maintain these principles of accountancy to every detail.
The major principles are as follows:

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 Relevance The information should be relevant so that decision making becomes
easier.
Reliable The information should be reliable so that your client can depend upon it
for accuracy.
Neutrality The team members in accounting concepts and principles assignment
help in My Homework help says that that infos should be totally unbiased.
Faithful representation The transactions presented in the books of accounts should
be faithfully represented.
Prudence When you are preparing financial statements; always check it from an
expert accountant.
Completeness You should always provide a complete financial report so that
information got is reliable.

All these comprise the basic accountancy concept and you will need to explain them in your
assignments. We are here to help you and there is no need to worry at all. Our experts are
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When there are larger principles of accountancy, smaller ones are important too. They are
single economic entity, measurement of money theory, comparability, understandability,
materiality, going concern concept, accrual concept, business entity, and substance over the
form concept, realization concept and duality concept.

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4.4 Limitation of Accounting Concept

1. Business Entity Concept
Drawing a line of separation between the owner and the business is very thin in the case of
sole proprietorship and partnership, but not so in the case of companies. Sometimes it
becomes very difficult to differentiate between the personal expenses and business expenses.

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For example, use of personal car for the purpose of business or use of official phone for
personal purposes etc.

2. Money Measurement Concept

(i) Ignore Qualitative Aspects:
Money measurements underline the fact that in accounting only those events, happenings or
transactions can be recorded which can be measured in terms of money only. However, there
are certain facts which, though important for judging the financial position of the business
enterprise, cannot find place in the books of accounts because they cannot be measured in
terms of money. For example, an efficient manager is not recorded as an asset or a dishonest
employee is never recorded as a liability for a business. This is the biggest limitation of
money measurement concept.

(ii) Ignores Price level Changes:

Another limitation is associated with the purchasing power, the primary characteristic of the
monetary unit. Since the transactions are recorded at their money value on the date of
occurrence, it ignores subsequent changes in the money value. In other words, money
measurement ignores the impact of price level changes by not considering the inflationary
movements into account.

3. Going Concern Concept

Limitation of going concern concept The limitation of going concern is if a business concern
prepares financial statements on a going concern basis, when it is not actually so, this has a
genuine reflection on reality and reasonableness of the financial statements. It might along
these lines misdirect because such a large number of firms close down (especially during
periods of Recession) after the publication of their accounts which have been drawn up on the
basis of the going concern principle.

4. Accounting Period Concept

Despite the significance of this assumption, it is not free from the following shortcomings:

(i) Identification of accounting year is difficult:

As per the accounting period assumption, business transactions are identified and recorded on
the basis of that particular accounting period. However, in real life there are so many
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transactions which relate to more than one accounting period. Sometimes, it becomes very
difficult to identify and establish to which accounting year such transactions relate. For
example, deferred revenue expenditure or payment for the purchase of fixed assets.

(ii) Misleading results when different accounting methods are adopted:

Another limitation of accounting period arises when entities follow different accounting
methods for recording of depreciation or stock valuation in different accounting periods. In
those circumstances, results from comparisons of different accounting periods would be
misleading.

5. Accounting Cost Concept

The biggest limitations of this concept are:

(i) The true worth of the business is not shown in the books of accounts and the business may
hide gains had those assets been shown at their market values.

(ii) Assets for which no amount is paid cannot be recorded in the books of accounts. For
example, reputation or goodwill of the business enterprise.

(iii) A balance sheet prepared on the basis of cost concept does not indicate the price at which
the assets could be sold, as against a relevant balance sheet prepared on the basis of market
value.

Keeping in view the above, accounting information based on historical cost is not much
useful to its users, creditors and financial institution in particular and management in general
because the parties interested in the business e.g. prospective customers, investors, lenders,
suppliers etc. are interested in determining what the business is worth in todays date rather
than its worth based on past data.

6. Duality Aspect Concept

This aspect establishes the relationship of business transaction in monetary terms. There are
certain facts, which though important for judging the financial position of the business
enterprise, cannot find a place in the books of accounts because they cannot be measured in

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terms of money. For example, an efficient manager is not recorded as an asset or a dishonest
employee is never recorded as a liability for a business.

7. Realization Concept
The main limitations of revenue recognition concept are as under:

(i) It fails to recognize the revenue in case of contracts for long-term projects. For example,
contract for construction of Metro Rail Project which takes 10-15 years to complete. In this
case, should we consider the whole amount of contract as revenue on the date of completion
of the project or on the date of entering into contract? As per Income Tax rules, for each year,
revenue is considered on the basis of the part of the contract completed during that year.

(ii) In the case of goods sold on the basis of hire purchase system, the amount collected in
each year as installment is treated as the revenue realized during that particular year instead
of total selling price.

8. Accrual Concept
(i) Date of Recording
The accrual method of accounting involves recording transactions at the time the service
occurs or the goods are delivered rather than when payment is exchanged. The date of an
invoice, therefore, may be different from that of the actual payment to the vendor. In such a
case, the company records the transaction as an expense on the invoice date while creating a
liability to pay the vendor. If this procedure is not strictly followed, transactions might be
booked in the wrong period, thus distorting the company's true financial state.

(ii) Difficult to Implement

While it can be simple to record a payment or receipt, it is not always easy to understand the
complex rules and standards of accrual accounting. "Accrual" or "accrued" refers to the
occurrence of a transaction, whether or not any benefits have been received or given up. In
many cases, it may not be evident when such an event has occurred. For example, a sale
made can easily be recorded when payment is received for it. Under the accrual basis of
accounting, however, sales are recorded when all risks and rewards have been fully
transferred to the customer, whether or not the customer has paid for the product or service.

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(iii) Early Tax Payments
If a company's accountants use the accrual basis of accounting, they record revenues when
transactions are made rather than when payments are received. Consequently, the income
statement of a business might show a profit in a tax year if sales have been made, even if no
payments have been received. Under the accrual basis, then, a business may have to pay taxes
earlier. Even if the company received no cash payments, it still accrues a tax liability for the
revenue booked under the accrual basis.

9. Matching Concept
The limitations of the matching concept are as under:

(i) It does not take inflationary pressure into consideration. This principle fails to take
inflationary pressures into account. For example, machinery purchased originally for Tk. 1,
00,000 in the year 2015 might be worth more than many times after some years. But
depreciation is charged every year on the original cost only.

(ii) Sometimes it is very difficult to estimate the actual benefits received and the benefits
likely to be received in future periods. In that case proper allocation of expenses related to the
current year and future years would be a difficult task. For example, amount paid for
advertisement.

Above all, matching principle constitutes one of the most crucial concepts in accounting and
should be understood thoroughly before recording transactions in the books of accounts.

10. Verifiability & Objectivity Evidence Concept

Each and every transaction is not subject to verification because the same is neither possible
nor feasible. The same voucher can be used for more than one purpose. For example, the
same voucher for petrol can be used for different cars used by the business enterprise. It can
be said that this principle holds, when the intention of the persons involved in accounting is
not malafide and they are not pressurized by the owner and management.

11. Full Disclosure Concept

The limitations of full disclosure are as under:

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(i) Historical in nature:
The information contained in the financial statements is historical in nature and reflects the
past position of business organization.

(ii) Records only monetary transactions:

The information which can be measured in terms of money can be recorded in accounting. A
lot of transactions, though important and have a significant impact on the working of
enterprise, do not find place in books of accounts as they are non-financial in nature. For
example, in-effective control prevailing in the organization, inefficient employees, market
conditions, change of government policies etc.

(iii) Window Dressing and Personal bias:

Sometimes, events are measured on the basis of estimates. In those cases, judgment of the
person who is estimating the events plays a vital role in accounting. For example, estimating
the useful life of the asset for calculating of depreciation. So we can say window dressing and
personal bias of an individual influence the personal judgments.

12. Materiality Concept

One of the limitations on decision making is how much information is needed to disclose on
the face of a companys financial statements or as a note. If accountants want to be
comprehensive and include all economic events, financial statements will contain huge
unnecessary information and this will mislead the readers of financial statements. On the
other hand, if accountants fail to disclose an economic event or to choose the adequate
method to present economic information would mislead the users of financial statements.
This means that the perceptions or judgments of materiality by accountants may differ from
the perceptions of materiality of the users of financial statements.

13. Conservatism Concept

(i) Inconsistent with the principle of consistency:
Convention of conservatism leads to inconsistency in the sense that while adopting the
methods which would have least effect on overstatement of profits and assets, sometimes in
two successive years the business entities have to adopt two different methods of accounting.
For example, in one year stock is valued at cost price (being less than the realizable value)
and in the next year stock is valued at market price (being less than the cost price).
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(ii) Creates secret reserves:
Too much of conservatism might lead to misinterpretation and result in creation of secret
reserves which goes against the principle of full disclosure. It is reminded again that the tool
of principle of conservatism should be used in the most cautious and rational manner.

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 CHAPTER - FIVE
CONCLUSION

5.1 Concluding Remark

Accounting concepts and principles homework help say that, financial informations shall
never be misleading and should always be corrected from the accountants. To know accounts,
it is necessary to follow the principles of accounts. These principles are golden rules upon
which a company runs its financial segment. Accounting principles change from time to time
and for a student of commerce, it is necessary to know what the changes are. You can also
say that accounting principles are a set of certain conventions that have been generated to
maintain an exact framework for reporting in finance.

Accounting Concepts and Principles are a set of broad conventions that have actually been
developed to supply a fundamental structure for monetary reporting. As monetary reporting
includes substantial expert judgments by accounting professionals, these principles and
concepts make sure that the users of monetary info are not misinformed by the adoption of
accounting policies and practices that break the spirit of the accountancy occupation.
Accounting professionals should for that reason actively think about whether the accounting
treatments embraced follow the accounting concepts and principles.

Due to the fact that of typically accepted accounting principles we are able to presume that
there is consistency from year to year in the approaches utilized to prepare a businesss
monetary declarations. Over the years the typically accepted accounting principles have
actually ended up being more complicated since monetary deals have actually ended up being
more complicated.

The essential or standard principles in accounting are the expense concept, complete
disclosure concept, matching concept, earnings acknowledgment concept, financial entity
presumption, financial system presumption, time duration presumption, going issue
conservatism, presumption, and materiality.

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5.2 Recommendation

Accounting concept refers to the basic assumptions which serve the basis of recording
actual business transactions.
The important accounting concepts are business entity, money measurement, going
concern, accounting period, cost concept, duality aspect concept, realization concept,
accrual concept, and matching concept.
Business entity concept assumes that for accounting purposes, the business enterprise
and its owner(s) are two separate entities.
Money measurement concept assumes that all business transactions must be recorded
in the books of accounts in terms of money.
Going concern concept states that a business firm will continue to carry on activities
for an indefinite period of time.
Accounting period concept states that all the business transactions are recorded in the
books of accounts on the assumption that profits of transactions is to be ascertained
for a specified time period.
Accounting cost concept states that all assets are recorded in the books of accounts at
their cost price.
Dual aspect concept states that every transaction has a dual effect.
Realization concept states that revenue from any business transaction should be
included in the accounting records only when it is realized
Matching concept states that the revenue and the expenses incurred to earn the
revenue must belong to the same accounting period.

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 BIBLIOGRAPHY

Book References
1. Principle of Accounting, Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso:
Books..
2. Intermediate Accounting, 16th Edition. by Donald E. Kieso, Jerry J. Weygandt.
3. Fundamental financial accounting concepts / Thomas P. Edmonds.

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