Notes on Basic Accounting Concepts and Assumptions | other > Other > Book Keeping and Accounting Concept | KULLABS.COM

Basic Accounting Concepts and Assumptions

  • Note
  • Things to remember
  • Videos
  • Exercise
  • Quiz

.

To know the profitability and financial position of a business, different types of financial statements are to be prepared. The financial statements are to be prepared on the basis of certain assumptions, concepts, and principles which are known as basic accounting concepts or principles. The fundamental concepts and principles of accounting are known as Generally Accepted Accounting Principles (GAAP). The following are the main concepts or principles of accounting:



  1. Business Entity Concept

    This concept states that the business is different from its owner and all other economic activities. Business is treated as separate entity. It is established to continue its transactions over a long period of time. The matter of business should not be mixed with the private matter of the owner. This concept is essential to ascertain the true financial picture of the business.
  2. Money Measurement Concept
    All the transaction must be expressed in terms of money. Under this concept, all the business transactions relating to goods, assets and liabilities are to be recorded in their monetary value. The transaction which is not in terms of money cannot be recorded.

  3. Accounting period Concept
    Accounting period concept is also known as time eriod assumption. This concept implies that the economic life is divided into different periods. Usually its a period of 365 days or 52 weeks. 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.

  4. Realization Concept
    This concept states that revenue is assumed to be earned when goods are sold to the customers either on cash or credit. It is not compulsory that revenue must realize in cash at the time of selling goods. At the end of the year, there may be outstanding expenses and accrued incomes. The revenue during an accounting period should only be considered while preparing financial statements.

  5. Cost concept
    This concept is based on the going concern concept. According to this concept, the cost is assumed to be incurred when the service or the asset is used to generate revenue. It stops any kind of manipulation while taking into account the net realizablevalue or market value.

  6. Matching Concept
    This concept is based on the accounting period concept. The expenditureof a firm for a particularaccounting period are to be matched with the revenue of the same accounting period to ascertain accurate profit or loss of the organization for the same period.

  7. Going concern Concept
    This concept states that a business does not have a definite life and it runs for a long period of time. So, all the long term expenditures are performed and recorded in the books of account assumingthat it will run for long period of time. Therefore, the balance sheet always shows fixed assets at cost after subtracting th depreciation.



  • Accounting is related with the recording, classifying and summarizing the financial transactions to know the profitability and financial position of a business.
  • Different types of financial statements are to be prepared on the basis of certain assumptions, concepts, and principles which are known as basic accounting concepts or principles. 
  • Business entity concept states that the business and its owners are two separate and distinct entities.
  • Money measurement concept states that only those transaction which can be measured and expressed in terms of money are recorded in the books of accounts.
  • Accounting period concept implies that the total life of the business is divided into different imaginary time interval for the purpose of recording and reporting the financial performance of the concerned parties. 
  • Realization concept states that revenue is assumed to be earned when goods are sold or services rendered to the customers either on cash or credit. 
  • Cost concept implies that when the fixed assets are purchased they are to be recorded in the books of accounts at their cost price. 
  • According to the matching 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.
  • The dual concept states that every business transaction has two-fold effects. 
.

Very Short Questions

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.

0%
  • What is the full form of GAAP?

    Generally Accepted Accounting Principles


    Generally Accepted Accountancy Projects


    Governmentally Ascertained Accounting Principles


    Generally Asserted Arbitrary Principles


  • ______ states that the business and its owners are two separate and distinct entities.

    Money measurement concept


    Realisation concept


    Accounting period concept


    Business entity concept


  • ______ states that only those transaction which can be measured and expressed in term of money are recorded in the books of accounts.

    Accounting period concept


    Matching concept


    Realisation concept


    Money measurement concept


  • ______ implies that the total life of the business is divided into different imaginary time interval and such time interval contain 12 months for the purpose of recording and reporting the financial performance to the concerned parties.

    Money measurement concept


    Accounting period concept


    Business entity concept


    Dual concept


  • ______ states that revenue is assumed to be earned when goods are sold or services rendered to the customers either on cash or credit.

    Realisation concept


    Accounting period concept


    Cost concept


    Business entity concept


  • ______ implies that when the fixed assets are purchased they are to be recorded in the books of accounts at their cost price.

    Cost concept


    Money measurement concept


    Business entity concept


    Matching concept


  • ______ implies that 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.

    Accounting period concept


    Matching concept


    Dual concept


    Business entity concept


  • ______ states that every business transaction has two-fold effects.

    Accounting period concept


    Dual concept


    Business entity concept


    Money measurement concept


  • You scored /8


    Take test again

ASK ANY QUESTION ON Basic Accounting Concepts and Assumptions

No discussion on this note yet. Be first to comment on this note