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Accounting concepts define the assumptions on the basis of which financial statements of a business are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process. The word concept means idea or notion, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods. Now we shall study in detail the various concepts:-
1. Entity Concept: Entity concept states that business enterprise is a separate identity apart from its owner. We should treat organization as distinct from its owner. Business transactions are recorded in the business books of accounts and owner’s transactions in his personal books of accounts. The practice of distinguishing the affairs of the business from the personal affairs of the owners originated only in the early days of the double entry book keeping. This concept helps in keeping business affairs free from the influence of the personal affairs of the owner. This basic concept is applied to all the organizations whether sole proprietorship or partnership or corporate entities.
2. Money Measurement Concept: As per this concept, only those transactions, which can be measured in terms of money, are recorded. Since money is medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of being measured in terms of money be only to be recorded in the books of accounts. Transactions, even if, they affect the result of the business materially, are not recorded if they are not convertible in monetary terms. Transactions and events that cannot be expressed in terms of money are not recorded in the business books. For example employees of organization are no doubt, the assets of the organization but their measurement in monetary terms is not possible therefore, not included in the books of account of the organization. Measuring unit for money is taken as the currency of the ruling country.
3. Periodicity Concept: This is also called the concept of definite accounting period. If a concern lasts for 200 years, it is not desirable to measure it performance as well as financial position only at the end of its life. So a small workable fraction of time is chosen out of infinite life cycle of the business entity for measuring performance and looking at the financial position. Generally one year period is taken up for performance measurement and appraisal of financial position. According to this concept accounts should be prepared after every period and not at the end of the life of entity.
4. Matching Concept: In this concept, all expenses matched with the revenue of that period should only be taken into consideration. In the financial statements of the organization if any revenue is recognized then expenses related to that revenue should also be recognized.
5. Going Concern Concept: The financial statements are normally prepared on the assumptions that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed. The valuation of assets of a business entity is dependent on this assumption.
6. Consistency Concept: In order to achieve comparability of the financial statements of an enterprise though time, the accounting polices followed consistently from one period to another; a change in an accounting policy is made only in certain exceptional circumstances. The concept of consistency is applied particularly when alternative methods of accounting are equally acceptable.
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