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Accounting Concept And Application
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Accounting Concepts MODULE - 1Basic Accounting
2 Notes
ACCOUNTING CONCEPTS
In the previous lesson, you have studied the meaning and nature of business
transactions and objectives of financial accounting. In order to maintain
uniformity and consistency in preparing and maintaining books of accounts,
certain rules or principles have been evolved. These rules/principles are
classified as concepts and conventions. These are foundations of preparing
and maintaining accounting records. In this lesson we shall learn about
various accounting concepts, their meaning and significance.
OBJECTIVES
After studying this lesson, you will be able to :
l explain the term accounting concept;
l explain the meaning and significance of various accounting concepts
: Business Entity, Money Measurement, Going Concern, Accounting
Period, Cost Concept, Duality Aspect concept, Realisation Concept,
Accrual Concept and Matching Concept.
2.1 MEANING AND BUSINESS ENTITY CONCEPT
Let us take an example. In India there is a basic rule to be followed by
everyone that one should walk or drive on his/her left hand side of the road.
It helps in the smooth flow of traffic. Similarly, there are certain rules that
an accountant should follow while recording business transactions and
preparing accounts. These may be termed as accounting concept. Thus, this
can be said that :
Accounting concept refers to the basic assumptions and rules and
principles which work as the basis of recording of business transactions
and preparing accounts.
ACCOUNTANCY 17
, MODULE - 1 Accounting Concepts
Basic Accounting
The main objective is to maintain uniformity and consistency in accounting
records. These concepts constitute the very basis of accounting. All the
concepts have been developed over the years from experience and thus they
are universally accepted rules. Following are the various accounting
concepts that have been discussed in the following sections :
Notes
l Business entity concept
l Money measurement concept
l Going concern concept
l Accounting period concept
l Accounting cost concept
l Duality aspect concept
l Realisation concept
l Accrual concept
l Matching concept
Business entity concept
This concept assumes that, for accounting purposes, the business enterprise
and its owners are two separate independent entities. Thus, the business and
personal transactions of its owner are separate. For example, when the
owner invests money in the business, it is recorded as liability of the
business to the owner. Similarly, when the owner takes away from the
business cash/goods for his/her personal use, it is not treated as business
expense. Thus, the accounting records are made in the books of accounts
from the point of view of the business unit and not the person owning the
business. This concept is the very basis of accounting.
Let us take an example. Suppose Mr. Sahoo started business investing
Rs100000. He purchased goods for Rs40000, Furniture for Rs20000 and
plant and machinery of Rs30000. Rs10000 remains in hand. These are the
assets of the business and not of the owner. According to the business entity
concept Rs100000 will be treated by business as capital i.e. a liability of
business towards the owner of the business.
Now suppose, he takes away Rs5000 cash or goods worth Rs5000 for his
domestic purposes. This withdrawal of cash/goods by the owner from the
18 ACCOUNTANCY
, Accounting Concepts MODULE - 1
Basic Accounting
business is his private expense and not an expense of the business. It is
termed as Drawings. Thus, the business entity concept states that business
and the owner are two separate/distinct persons. Accordingly, any expenses
incurred by owner for himself or his family from business will be considered
as expenses and it will be shown as drawings.
Notes
Significance
The following points highlight the significance of business entity concept :
l This concept helps in ascertaining the profit of the business as only the
business expenses and revenues are recorded and all the private and
personal expenses are ignored.
l This concept restraints accountants from recording of owner’s private/
personal transactions.
l It also facilitates the recording and reporting of business transactions
from the business point of view
l It is the very basis of accounting concepts, conventions and principles.
INTEXT QUESTIONS 2.1
Fill in the blanks with suitable word/words
(i) The accounting concepts are basic ....................... of accounting.
(ii) The main objective of accounting concepts is to maintain .......................
and ....................... in the accounting record.
(iii) ....................... concept assumes that business enterprise and its owners
are two separate independent entities.
(iv) The goods drawn from business for owner’s personal use are called
.......................
2.2 MONEY MEASUREMENT CONCEPT
This concept assumes that all business transactions must be in terms of
money, that is in the currency of a country. In our country such transactions
are in terms of rupees.
Thus, as per the money measurement concept, transactions which can be
expressed in terms of money are recorded in the books of accounts. For
example, sale of goods worth Rs.200000, purchase of raw materials
ACCOUNTANCY 19
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