Accounting Concepts and Conventions

1. Business Entity Concept: Owner and business are two separate entities, and transactions must
be recorded from the viewpoint of business and not from the viewpoint of the owner. Business
must record the transactions done with the owner just like any other person.
2. Money Measurement: Only those transactions which can be expressed in terms of money can
be recorded in books of accounts. Events and traits not capable of being translated in terms of
money (like quality, honesty, etc.) cannot be recorded in books of accounts
3. Dual Aspect: Every transaction will impact the business in such a way that its assets and
liability will always equate. A transaction can:
 Increase both assets and liabilities
 Decrease both assets and liabilities
 Increase an asset and simultaneously decrease an asset
 Increase a liability and simultaneously decrease a liability
4. Going Concern: Unless there is a contrary indication, a business shall always be assumed to
have an infinite economic life. If the business is not a going concern, all its assets and liabilities
must be constantly revalued at a realizable value, which can be a very resource and time-
consuming process.
5. Historical Cost Concept: All the assets must be recorded at the cost at which they were
acquired and must be depreciated systematically assuming the business being a going concern.
6. Accounting Period Concept: Although the business is assumed to have an indefinite life, the
accounting records and results must be prepared for shorter consistent periods so that the
information is timely available. This concept states that the economic life of the business must
be split into smaller reporting periods, which is usually one year.
7. Revenue Recognition: A transaction must be recorded as sale (revenue) if the ownership of
goods and services has passed to the buyer, and there is no uncertainty about the collectability
of the amount. If these two conditions are satisfied, the transaction can be recorded as a sale
even if the amount is not yet collected (i.e., the transaction is on credit).
8. Matching: If a transaction is recognized as revenue, all the expenses which have been incurred
on such transactions must be recorded as expenses, irrespective of whether paid or not.
9. Accrual: Record the transactions as and when they are due and not when actual cash is received
or paid.
10. Consistency: Accounting discipline provides alternative methods for dealing with situations.
This concept states that once a particular method is selected, it must be consistently followed
for similar situations arising in the future.
11. Conservatism: It’s better to be conservative. All the probable expenses must be provided for
in advance whereas all the expected incomes must not be recorded unless it is sure that those
incomes will be earned and received by the business. Thus, it is better to understate profits
rather than overstate them.
12. Full Disclosure: All transactions must be recorded irrespective of their quantum.
13. Materiality: All immaterial transactions can be clubbed under suitable headings, and there is
no need to separately disclose immaterial items.
14. Timeliness: Accounting information is useful only if it is made available on a timely basis.
Some accuracy can be foregone (obviously after disclosing the inaccuracy) to provide
information which is largely accurate on a timely basis.
15. Verifiable Objective Evidence Concept: All transactions (to be recorded in the books of
accounts) must have a valid and verifiable proof, also known as a voucher in accounting.