ACCOUNTING CONCEPTS

Objectivity Concept

 The objectivity principle states that financial and accounting information needs to be

independent and free from bias. This means that financial reporting like a company’s financial

statements need to be based on evidence and not opinions. Obviously, in some areas professional

accountants need to express their opinions, but the objectivity principles says that opinions can’t

be the sole bases for an accounting treatment.

Subjectivity Concept

When the approach is subjective it simply means that you wish to used your own judgment or

method of valuation even though no one else may agree to it.

Historical Cost Concept

Historical Cost requires companies to record the purchase of goods, services, or capital assets at

the price they paid for them. Assets are then remain on the balance sheet at their historical

without being adjusted for fluctuations in market value.

Going Concern Concept

The going concern concept of accounting implies that the business entity will continue its

operations in the future and will not liquidate or be forced to discontinue operations due to any

reason. ... Another example of the going concern assumption is the prepayment and accrual of

expenses.
 Money Management Concept
Money Measurement Concept in accounting, also known as Measurability Concept, means

that only transactions and events that are capable of being measured in monetary terms are

recognized in the financial statements.

Business Entity Concept

The business entity concept states that the transactions associated with a business must be

separately recorded from those of its owners or other businesses. Doing so requires the use of

separate accounting records for the organization that completely exclude the assets and

liabilities of any other entity or the owner.

Dual aspect Concept

The dual aspect concept states that every business transaction requires recordation in two

different accounts. This concept is the basis of double entry accounting, which is required by

all accounting frameworks in order to produce reliable financial statements

Consistency Concept

Consistency Principle – all accounting principles and assumptions should be applied consistently

from one period to the next. This ensures that financial statements are comparable between

periods and throughout the company’s history.

 Prudence Concept

The prudence concept, also known as the conservatism principle, is an accounting

principle that requires an accountant to record liabilities and expenses as soon as they occur, but

revenues only when they are assured or realized

Realization Concept

The realization principle is the concept that revenue can only be recognized once the

underlying goods or services associated with the revenue have been delivered or rendered,

respectively. Thus, revenue can only be recognized after it has been earned

Accruals Concept

Under Accruals basis of accounting, income must be recorded in the accounting period in which

it is earned. Therefore, accrued income must be recognized in the accounting period in which it

arises rather than in the subsequent period in which it will be received. Conversely, prepaid

income must be not be shown as income in the accounting period in which it is received but

instead it must be presented as such in the subsequent accounting periods in which the services

or obligations in respect of the prepaid income have been performed.