Basic Accounting

Concepts
 BASIC CONCEPTS
 Statements of Financial
Accounting Concepts
 Adopted by FASB

 Conceptual criteria to help

resolve future accounting issues.

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 Basic Concepts
1. Money measurement.
2. Entity.
3. Going concern.
4. Historical Cost.
5. Accounting period.
6. Accrual Concept
7. Realization.
8. Prudence
9. Matching.
10. Consistency.
11. Materiality.

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 Money Measurement
 Accounting records are recorded in
monetary terms at the value at time
transaction is recorded.

 This is a severe limitation.

 If something can’t be valued it can’t be
recorded; e.g., president’s health, affect of
strike.

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 Business Entity
 Distinguish from owner.
 May or may not be separate legal entity.

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 Going Concern
 Assumed to continue in operation
for an indefinite period.
 Proof – Balance sheet

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 Historical Cost
 Assets are recorded at cost, that is,
price paid.
 Fair value = amount for which asset
could be currently purchased or sold.
 Book value of asset = recorded value.

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 Accounting Period
 Accounts are prepared for a specific
time span
 Usually for one year.

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 Accrual Concept
 Income and the expenses for a specific
period should be considered
irrespective of the amount paid
 Accrued Expenses – Report as Liability
 Prepaid Expenses – Report as Asset

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 Realization
 Income or expenses should have been
realized before recorded
 Realized by legality

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 Prudence
 Make provision for future losses not for
gains
 Provision for doubtful debt
 Stock valuation

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 Matching
 Income should be matched with the
expenses incurred to earn the income
 Depreciation
 Gross Profit = Sales – Cost of Sales

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 Consistency
 Same accounting practice ,
between years
 Straight Line Vs Reducing
Balance

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 Materiality
 Report what is relevant to be
reported
 Income statement presentation

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