Principles Of Accounting O'Level: Accounting Concepts

Principles Of Accounting O'Level

Accounting Concepts
THERE ARE 2 TYPES OF ACCOUNTING CONCEPTS:

1. Fundamental accounting concepts

2. Underlying accounting concepts.

Fundamental Accounting Concepts

There are five accounting concepts:
1. Going Concern Concept
The going concern concept implies that the business will continue to operate in the
foreseeable future. A business is a going concern if it has no intention to discontinue its
activities. Accounts are usually prepared under the going concern concept. In case a
business is not a going concern, assets will be shown at the price at which they may be
sold when the business closes down.

2. Consistency Concept
A business must choose a method to record its transactions which will show a more
realistic view of the business. If a business chooses one method to record one
transaction, the consistency concepts states that it should continue to use this method
in the subsequent years unless the method does not show a realistic view or an
another valid reason is given.

3. Prudence Concept
The prudence concepts states that all losses should be recorded in the books as soon
as they are recognized, but gains and profits should not be recorded unless they are
realized, that is, the business should get the profit or gain in reality. The aim of the
prudence concept is to prevent profits from being overstated.

4. Matching Concept (Accrual Concept)

The matching concept states that net profit is the difference between revenue and
expenditure incurred. That is;
NET PROFIT = REVENUE - EXPENDITURE

The matching concept also states that if an expense is incurred in a financial year, then
the expense should be included in the final accounts of that year itself, whether the
expense has been paid or not.

5. Materiality Concept
The materiality concept states that only items which are material will be recorded in the
books. There is no need for absolute precision on the books. For instance, a pocket
calculator costing only $8 will not be considered as a non-current asset, although its
useful life is 5 years.

Underlying Accounting Concepts

1. Historical Cost Concept
Under the historical cost concept, the assets are shown at their cost price.

2. Money Measurement Concept

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 Principles Of Accounting O'Level: Accounting Concepts
Accounting information consists of only those transaction which have a monetary value
to which most people will agree. The limitation of this concept is that accounting can
never provide each and every information of the business. For example, it cannot show
whether the business has problem with the workforce.

3. Business Entity Concept

This concept states that the business has separate existence from that of the owner.

4. Dual Aspect Concept

The dual aspect concepts states that every transactions should have two aspects, one
debit and the other credit (Double entry system is applied).

5. Time Interval Concept

This concepts states that final accounts should be prepared at a regular time interval of
one year.

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