The business entityconcept states that the business and its owners are two separate and distinct entities and the business is established to continue its transactions over a long period of time. For accounting purpose, every business enterprises are treated as a separate entity which is distinct from its owner. The financial transactions are to be recorded from the viewpoint of the business and not from the viewpoint of its owner. Such distinction is essential to ascertain the true financial picture of the business.
Money measurement concept assumes that only those transactions which can be measured and expressed in terms of monetary value i.e. Rupee, Dollar, etc. have to be taken into account. Under this concept, all the business transactions relating to goods, assets and liabilities are to be recorded in their monetary value.
The dual concept states that every business transaction has two-fold effects. When the transaction is performed, its effect is made on two different accounts. If one account is debited; another account must be credited with the equal amount. This concept of duality in transactions always equalizes the assets and liabilities in the balance sheet.
The matching concept is a guideline for determining the profit or loss of a business. According to this concept, the revenue earned has to be compared with the expenses incurred in the same period to determine the true profit or loss of the business. If the amount of revenue is more than expenses, the result is net profit but if the amount of revenue is less than expenses, the result is a net loss.
The realizationconcept states that revenue is assumed to be earned when goods are sold or services rendered to the customers either on cash or credit. It is not compulsory that revenue must realize in cash at the time of selling goods and rendering services. At the end of the year, there may be outstanding expenses and accrued incomes. Such expenses and incomes should be considered while preparing financial statements.
The costconcept implies that when the fixed assets are purchased they are to be recorded in the books of accounts at their cost price. The valuation of the assets is not made on its market price. The balance sheet always shows the value of fixed assets after deducting the amount of depreciation from their cost price.
Accounting period concept implies that the total life of the business is divided into different imaginary time intervals and such time interval contains 12 months for the purpose of recording and reporting the financial performance to the concerned parties. Each time travel interval contains normally one year which is known as accounting period. In Nepal, accounting period begins on 1st Shawan of every year and ends on the last day of Ashadh of the next year. At the end of accounting period, financial statements are prepared to determine the profit or loss and financial position of the business.