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Accounting Concepts and Assumptions

1. Accounting concepts and assumptions provide the foundational principles for preparing and maintaining accounting records. 2. Major concepts include the historical cost concept, business entity concept, money measurement concept, dual aspect concept, time interval concept, going concern concept, consistency concept, prudence concept, realization concept, matching and accruals concept, separate determination concept, and materiality concept. 3. These concepts establish rules for recording and reporting transactions and preparing financial statements.

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Miriam Rapa
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692 views3 pages

Accounting Concepts and Assumptions

1. Accounting concepts and assumptions provide the foundational principles for preparing and maintaining accounting records. 2. Major concepts include the historical cost concept, business entity concept, money measurement concept, dual aspect concept, time interval concept, going concern concept, consistency concept, prudence concept, realization concept, matching and accruals concept, separate determination concept, and materiality concept. 3. These concepts establish rules for recording and reporting transactions and preparing financial statements.

Uploaded by

Miriam Rapa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting concepts and assumptions

In Accounting, one should have a basic understanding of these


accounting principles. Without even knowing, we use these set
of rules and assumptions whenever we are doing Accounting
work. These concepts are foundations of preparing and
maintaining accounting records.
Following is a list of major accounting concepts and principles :
1. The Historical Cost Concept or the Cost Concept
The historical cost principle states that businesses must
record and account for most assets and liabilities at their
purchase or acquisition price. In other words, businesses
have to record an asset on their balance sheet for the
amount paid for the asset.
2. Business Entity Concept
The business entity concept, states that businesses and
the owners should be accounted for separately. This is
because the business and the owner are two separate
entities. The only time that the personal resources of the
owner affect the accounting records of a business is
when :
New capital is introduced into the business
And when drawings are taken out of it.
3. The Money Measurement Concept
The monetary unit assumption assumes that all business
transactions and relationships can be expressed in terms
of money or monetary units. Money is the common
denominator in all economic activity and financial
transactions. That is why we assume that money is a good
basis for comparing companies and other accounting
measurements. In other words, accounting looks at
transactions that can be communicated in money or
monetary units.
4. The Dual Aspect Concept
The dual aspect concept is the underlying basis for the
double entry accounting system. The double entry system
is based on the duality principle and was devised to

account for all aspects of a transaction. Under this system,


aspects of transactions are classified under two main
types: Debit and Credit. Therefore this accounting concept
ensures that all aspects of a transactions are accounted
for in the financial statements.
5. Time interval concept
This concept states that the business is obliged to prepare
and report its financial statements over a standard period
of time, which is usually a twelve month period.
6. Going Concern Concept
The going concern concept or going concern assumption
states that businesses should be treated as if they will
continue to operate indefinitely or at least long enough to
accomplish their objectives. In other words, the going
concern concept assumes that businesses will have a long
life and not close or be sold in the immediate future.
Companies that are expected to continue are said to be a
going concern. Companies that are expected to close in
the near future are not a going concern.This concept is of
utmost importance because without it, businesses would
not be able to have the ability to prepay or accrue
expenses.
7. Consistency Concept
The consistency principle states that companies should
use the same accounting treatment for similar events and
transactions over time. In other words, companies
shouldn't use one accounting method today, use another
tomorrow, and switch back the day after that. Similar
transactions should be accounted for using the same
accounting method over time. This creates consistency in
the financial information given to creditors and investors.
8. Prudence Concept
Prudence concept is an important principle which states
that assets and income should not be overstated and
liabilities and expenses should not be understated. Profits
should not be anticipates until they are realized but one
must provide for any future losses related with benefits
already taken in the present accounting period
9. Realisation Concept

Revenues should only be recognized as soon as a product


has been sold or a service has been performed, regardless
of when the money is actually received. In other words,
any change in the market value of an asset or liability is
not recognized as profit or loss until the asset is sold or
liability paid off.
10.
Matching and Accruals concept
The matching concept states that the revenue and the
expenses incurred to earn the revenues must belong to
the same accounting period. So once the revenue is
realised, the next step is to allocate it to the relevant
accounting period. This can be done with the help of
accrual concept. Financial statements are prepared under
the Accruals Concept of accounting which requires that
income and expense must be recognized in the accounting
periods to which they relate rather than when payment is
made or received.
11.

Separate determination concept

Separate determination concepts holds that each


component of any category of assets or liabilities should
be valued separately when arriving at a total to be shown
in the accounts for that category. For example, the value
of each stock item should be calculated individually (at the
lower of cost and net realizable value) and these values
should then be totaled to give the stock figure which will
appear in the accounts.
12.

Materiality Concept

An accounting principle that states that financial reports


only need to include information that will be significant
(material) to their users. As such, materiality is a subjective
concept. Whether financial data is material or not depends not just
on its users but on its purpose.

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