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Concepts & principles

1. Business Separate Entity Concept
The business entity concept states that you must separately record the transactions associated with a
business from those of its owners or other businesses. Doing so requires the use of separate accounting
records for the business that completely exclude the assets and liabilities of any other entity or owner. This
concept is one of the basic accounting principles.
Ex: - business issues a !"#$$$ distribution to its sole shareholder. This is a reduction in equity in the
records of the business# and !"#$$$ of taxable income to the shareholder.
2. Going Concern Concept
%inancial statements are prepared assuming that the company is a going concern which means that the
company intends to continue its business and is able to do so. The status of going concern is important
because if the company is a going concern it has to follow the generally accepted accounting standards. The
auditors of the company determine whether the company is a going concern or not at the date of the
financial statements.
Ex: - n oil and gas firm operating in &igeria is stopped by a &igerian court from carrying out operations in
&igeria. The firm is not a going concern in &igeria# because it has to shut down.
3. Money Measurement Concept
The money measurement concept states that a business should only record an accounting transaction if it
can be expressed in terms of money. This means that the focus of accounting transactions is on quantitati'e
information# rather than on qualitati'e information. Thus# a large number of items are ne'er reflected in a
company(s accounting records# which means that they ne'er appear in its financial statements.
Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in
terms of money include: Employee s)ill le'el# Employee wor)ing conditions etc.
4. Periodicity Concept
This concept assumes that financial results *profit+loss, of a company is calculated at predefined
accounting periods *annually# half-yearly# quarterly# and monthly, and not deferred until the termination of
the business. nd it states that e'ery transaction should be assigned to its rele'ant accounting period.
-owe'er this is go'erned by 'arious accounting standards such as accruals prudence and reali.ation
concepts.
5. Accrual Concept
The accruals concept states that expenditure incurred in a particular accounting period accounted for in
that period# irrespecti'e of whether or not it has been in'ol'ed or paid for. /imilarly income that has been
earned in that period should be accounted for that period irrespecti'e of the date of the in'oice or the
receipt of money from the transaction.
6. Principle of Income Recognition
The income recognition principle states that# under the accrual basis of accounting# you should only record
income when an entity has substantially completed a re'enue generation process0 thus# you record re'enue
when it has been earned. %or example# a snow plowing ser'ice completes the plowing of a company(s
par)ing lot for its standard fee of !"$$. 1t can recogni.e the income immediately upon completion of the
plowing# e'en if it does not expect payment from the customer for se'eral wee)s.
7. Principle of Expense
The principle of expense simply lets the expenses follow the re'enues. 2e'enue recognition and expense
recognition wor) together to pro'ide the actionable e'ents of a gi'en accounting period. 3hen expenses
ma)e their contribution to re'enues is the point when expense recognition ta)es place# regardless of when
the expense is paid. This is also )nown as the matching principle which shows that efforts are equal to
results.
8. Principle of matching cost and revenue
fundamental concept of accrual basis accounting that offsets re'enue against expenses on the basis of
their cause-and-effect relationship. The principle states that# in measuring net income for an accounting
period# the costs incurred in that period should be matched against the re'enue generated in the same
period.
%or example# wages and materials bought to construct a rental property are depreciated o'er the period the
building generates income# not during the construction period.
9. Principle of istorical cost
n accounting method in which assets are listed on a balance sheet with the 'alue at which they were
purchased# rather than the current mar)et 'alue. The historical cost principle is used to reflect the amount of
capital expended to acquire an asset# and is useful for matching against changes in profits or expenses
relating to the asset purchased# as well as for determining past opportunity costs.
Ex: - "$$ units of an item were purchased one month bac) for !"$ per unit. The price today is !"" per unit.
The in'entory shall appear on balance sheet at !"#$$$ and not at !"#"$$.
10. Principle of !ull "isclosure
%ull disclosure principle is rele'ant to materiality concept. 1t requires that all material information has to be
disclosed in the financial statements either on the face of the financial statements or in the notes to the
financial statements.
Ex:-ccounting policies need to be disclosed because they help understand the basis of accounting.
11. "ou#le Aspect principle
This state that there are two aspects of accounting# one represented by the assets of the business and the
other by the claims against them. The concept states that these two aspect are always equal to each other.
1n other words# this is the alternate form of the accounting equation:
ssets45iabilities Capital
Double aspect concept is )nown as 6Double Entry 7oo) 8eeping /ystem6.
12. Modifying principle
There is a modifying principle in accounting when:
There are two or more generally accepted accounting principles that apply to a particular situation# and you
shift to the other principle0 or
3hen the accounting principle that former applied to the situation is no longer generally accepted0 or change
the method of applying the principle.
13. Principles of materiality
The materiality principle is the magnitude of an omission or misstatement in an entity(s financial statements
that ma)es it probable that a reasonable person relying on those financial statements would ha'e been
influenced by the omitted information or made a different 9udgment if the correct information had been
)nown. :nder generally accepted accounting principles *;<,# you do not ha'e to implement the
pro'isions of an accounting standard if an item is immaterial. This definition does not pro'ide definiti'e
guidance in distinguishing material information from immaterial information# so you must exercise 9udgment
in deciding if a transaction is material.
14. Principle of Consistency
The consistency principle states that# once you adopt an accounting principle or method# you should
continue to follow it consistently in future accounting periods. =ou should only change in accounting principle
or method if the new 'ersion in some way impro'es reported financial results. if you ma)e such a change#
you should fully document its effects# and include this documentation in the notes accompanying the
financial statements.
15. Principle of Conservation or Prudent
ccounting transactions and other e'ents are sometimes uncertain but in order to be rele'ant we ha'e to
report them in time. 3e ha'e to ma)e estimates requiring 9udgment to counter the uncertainty. 3hile ma)ing
9udgment we need to be cautious and prudent. <rudence is a )ey accounting principle which ma)es sure
that assets and income are not o'erstated and liabilities and expenses are not understated.
Ex:-7ad debts are probable in many businesses# so they create a special contra-account to accounts
recei'able called allowance for bad debts which brings the accounts recei'able balance to the amount which
is expected to be reali.ed and hence pre'ents o'erstatement of assets. n expense called bad debts
expense is also boo)ed to stop net income from being o'erstated.
References
". Business Entity Concept. >?nline@ a'ailable from: http:++www.accountingtools.com+questions-and-
answers+what-is-the-business-entity-concept.html >ccessed $A Barch C$"D@
C. Going Concern Concept. >?nline@ a'ailable from:
http:++accountingexplained.com+financial+principles+going-concern >ccessed $E Barch C$"D@
D. Money measurement concept. >?nline@ a'ailable from: http:++www.accountingtools.com+questions-and-
answers+what-is-the-money-measurement-concept.html >ccessed $E Barch C$"D@
F. Basic Accounting Concept >?nline@ a'ailable from:
http:++www.tutebox.com+D$G$+business+accounting+basic-accounting-concepts+
>ccessed $E Barch C$"D@
A. Revenue recognition principle >?nline@ a'ailable from: http:++www.accountingtools.com+re'enue-
recognition-principle >ccessed $E Barch C$"D@
E. Matching Principle >?nline@ a'ailable from: http:++www.businessdictionary.com+definition+matching-
principle.htmlHix..CBqgC3.a= >ccessed $E Barch C$"D@
I. Historical cost principle >?nline@ a'ailable from: http:++www.businessdictionary.com+definition+historical-
cost-principle.htmlHix..CBqiiGtF: >ccessed $E Barch C$"D@
J. Daul Aspect Concept >?nline@ a'ailable from:
http:++wi)i.answers.com+K+3hatLisLtheLdualLaspectLconcept >ccessed $E Barch C$"D@
G. Materiality principle >?nline@ a'ailable from:
http:++wi)i.answers.com+K+3hatLisLtheLdualLaspectLconcept >ccessed $E Barch C$"D@
"$. Conservation of prudence >?nline@ a'ailable from:
http:++wi)i.answers.com+K+3hatLisLtheLdualLaspectLconcept >ccessed $E Barch C$"D@