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Basic concepts in Accounting

The theory and practice of accounting is based upon the criteria basic assumptions which are referred to variously as concepts, principles, conventions and rules. For the convenience purpose, we will term them as ‘concepts’. The various concepts which form the basic of theory and practice of accoounting can be discussed as below.

1.    Business entity concept:

According to this concept, the business is assumed to be a distinct entity from the persons who own the business e.g. if there is a partnership concern carrying the name of M/s. X where Mr. A and Mr. B are partners, from accounting point of view, M/s. X is supposed to be separate entity from Mr. A or Mr. B The financial statements prepared on the basis of accounting records relate to the business i.e. M/s. X and not to Mr. A or Mr. B individually. It should be noted to the connection that the business entity concept has nothing to do with the legal entity of the business. It applies to both corporate organisation (which by itself a legal entity separate from the owners) as well as non-corporative organisation (which is not a legal entity separate from owners).

2.    Money measurement concept:

According to this concept only those transactions and facts find the place in the process of money. As such, all those transactions and facts which cannot be expressed in terms of money. (e.g. morale and motivation and facts which cannot goodwill of th eorganisation in the market etc.) are not within the purview of accounting though they may be having direct or indirect bearing on the business. This principle imposes servere restrictions on the kind of information available from the statements. In fact, it is one of the major drawbacks of financial statements.

3.    Cost concept:

According to this concept, the assests acquired by a business are recorded at their cost of acquisition and this cost is considered for all the susequent accounting purposes say charging of depreciation. This concept does not take into consideration the current market various assets.

4.    Going concern concept:

According to this concept it is assumed that the business entity is going to be in business for an indefinitely long period of time and is not likely to close down its business in a shorter period of time. This concept affects the valuation of assets and liabilities. As such, the assets are shown on the balance sheet at cost less depriciation and not at the current market price or realisable value. If the assets are to be disclosed at the correct value in the balance sheet, the current market price will be most suitable. However, as the business is likely to be a going concern in future and as the assets are not likely to be sold in the market in the near future, they are disclosed at cost less depriciation.

5.    Conservation concept:

This concept is usually expressed as – “anticipate all the future losses and expenses, however do not anticipare the future incomes and profits”. This principle is applicable to current assets generally and hence the current assets are valued at cost or market price which ever is lower. The valuation of non current assets is made at cost (as per the cost concept).

6.    Dual aspect concept:

According to this concept, every business transaction has two aspects, however the basic relationship between assets and liabilities i.e. assets are equal to liabilities, remains the same e.g. if Mr. A starts the business by introducing the capital of $ 50,000 the assets and liabilities will be as below:

Liabilities $ assets $
Capital 50000 Cash 50000