Basic Concepts And Conventions
Accounting principles are usually rules and conventions which have been adopted as a general guide to action by the accountancy profession.
1. The Business Entity Concept
All accounts are kept in respect of business entities which are distinct from the persons who own or manage these entities. Sometimes the law makes the same distinction, as in the case of a limited company which is a separate legal entity from the shareholders or its Directors.
2. Monetary Concept
Accounting uses money to express certain facts of a business and in such a way that they can be a useful expression of the wealth of the business.
3. Historical (Cost) Concept
The price paid to acquire an asset is recorded in the books and forms a basis for subsequent treatment. The result is that at any moment of time the values recorded in the books do not necessarily reflect the current value of the assets. The income of the business is measured by the difference between the value obtained for selling its products compared to the cost of the resources used in making them. The costs not yet expended are shown in the balance sheet.
4. Going Concern Concept
The accounting system will treat the values on the assumption that the business will continue trading. If the business decides to liquidate or become bankrupt then a different approach to valuation is required.
5. Dual Aspect Concept
All business events are regarded as having a dual aspect. In all business transactions equal values are exchanged. Each transaction involves two entries, a debit entry and a credit entry. Every debit must have a corresponding credit, and vice versa. Since every debit has a corresponding credit, the total debits must at any time equal the total credits. Whether this be so or not is easily ascertained by means of a Trial Balance.
6. Accrual Concept
The income accruing to the owner of a business is not necessarily the amount of cash actually received in a period of account. Many difficult problems arise in deciding how much income has actually accrued in any period. Accrual of income is always measured over a period of time which is normally the accounting year. Expenses are costs incurred in earning revenues. Those expenditures which may be charged against revenues for a period will be considered as operating expenses. The accrual concept is applied both in ascertaining the revenues for a period and in ascertaining the expenses to be charged against the revenues.