17/08/23

Accounting concepts

Assumptions made while

preparing financial statements

WHAT ARE ACCOUNTING CONCEPTS

Ideas or notions having universal
application

Accounting concepts lay the

foundation on the basis of which
accounting principles are
formulated
 WHAT
PURPOSE DO
THEY SERVE?
THEY HELP IN PREPARING FINANCIAL
STATEMENTS TO GIVE A TRUE AND FAIR VIEW
Entity concept

Business enterprise is a separate entity

apart from its owner

Business affairs should be different from

owner’s private transactions

The business owes the owner the

amount that he invested in the business
 Only those transactions that
can be measured in terms of
money are recognised
Money
Measurement
Home currency is the
measuring unit
Periodicity concept
Accrual Concept

Effects of transactions and events are recorded as and when they occur

Accrual means recognition of revenue and costs as they are earned or incurred and not as
money is received or paid.
The accrual concept relates to measurement of income, identifying assets and liabilities.
Accrual Concept provides the foundation on which the structure of present-day accounting
has been developed.
 All expenses incurred to match the revenue
recognised for the period should be accounted

Matching
Based on accrual concept

concept Periodic profit = periodic revenue – matched

expenses

Revenue earned is matched with the expense

incurred to earn such revenue & Revenue earned
during a period is compared with the expense
incurred during such period
Going Concern

Basic assumption that the business will be carried on

• indefinitely
• in the foreseeable future
• Assumed that the enterprise has neither the intention nor the need to liquidate or
curtail materially the scale of operations

This facilitates classification of assets as long term and short-term

assets
Cost concept

Value of an asset to be determined on the basis of

Historical cost or acquisition cost
Accountants traditionally prefer this in the interests of
objectivity
Other methods are not easily ascertainable or are not fair
enough
 Any change in the value of an asset is
to be recorded only when the
business realises it

On the lines of conservatism or

Realisation prudence

This concept requires at least the

following three qualitative
characteristics of Financial statements
• `Prudence, Neutrality and Faithful
representation of alternative values
Dual Aspect

Every transaction or event would have two perspectives:

• Assets – come in or go out
• Expense and Incomes
• Persons – giver or receiver

Accounting Equation: Assets – Liabilities = Capital

 No
anticipation of
income but
provide for all
losses

Conservatism or
Prudence For this
concept, all • Prudence
financial • Neutrality
statements
should have • Faithful representation
the following of alternative values
characteristics
Consistency

• In order to achieve comparability accounting policies need to be

consistently followed
• Consistency should not imply non-flexibility
• When can a policy be changed?
• To conform transactions to accounting standards
• To comply with law
• To make better presentation of financial statements