What is Accounting Concept

Accounting concepts and convention are assumptions /postulates or

laid down rules of accounting that need to be followed in preparation
of accounts and Financial Statements
These are the theories on how and why certain categories of
transactions should be treated in a particular manner
Important types of Accounting concepts

1. Business Entity Concept-Business and its owners are two separate
entities. Hence, business and owners can transact with each
other.
2. Going Concern Concept- It is assumed that business will continue
in foreseeable future.It is because of this concept we show
prepaid expenses as an asset in books of accounts
3. Money Measurement Concept-Accounting records only those
transactions which can be measured or expressed in terms of
money .For eg Loyalty of employees can not be recorded in
books of accounts
4. Accounting period-For measuring financial results, working life of
business is split into short periods called accounting period.
Normally it is 1 year i.e 1
st
April to 31
st
March
5. Historical Cost- Accounting is concerned with past events and it
requires consistency and comparability that is why it requires the
accounting transactions to be recorded at their historical costs
and not the current values. This is called historical cost concept
6. Dual Aspect concept-Every transaction shall have two sided
effects of same amount ( Debit and Credit)
eg, Cash sales of Rs 2000 .
Debit Cash Account Rs 2000
Credit Sales Account Rs 2000
7. Realisation concept- It tells that revenue is to be recognized only
when the rewards and benefits associated with the items sold or
service provided is transferred, where the amount can be
estimated reliably and when the amount is recoverable. So
revenue is recognised when earned ignoring when actual cash
flows happens
8. Matching Concept- It requires that expenses incurred to earn the
revenues recognised during the accounting period should be
recognised in that time period and not in the next or previous
period
Eg.Salary paid in 2012-13 relating to 2011-12 is an expense for
2011-12
9. Conservatism Under the conservatism principle, if there is
uncertainty about incurring a loss, you should tend toward
recording the loss. Conversely, if there is uncertainty about
recording again, you should not record the gain.This concept
makes sure that assets and income are not overstated and
liabilities and expenses are not understated.

10. Materiality - Financial statements are prepared to help the
users with their decisions. Hence, all such information which has
the ability to affect the decisions of the users of financial
statements is material and this property of information is called
materiality.Materiality depends upon the nature or size of event.
This concept is also helpful in deciding which items should appear
as line items and which ones are aggregated with others
11. Accrual concept-Business transactions are recorded when
they occur and not when the related payments are received or
made. This concept is called accrual basis of accounting and it is
fundamental to the usefulness of financial accounting
information.


Accounting Equation
It is the foundation of double entry system of accounting. The
accounting equation displays that all assets are either financed by
borrowed money or the owners money.
Assets = Equities
Asset is something of value that company owns
Equities are the rights or claims over the asset.
Equities are further divided into
Owners equity/Capital
Liability
So accounting equation becomes
Assets = Capital+Liability