Basic accounting concept and conventions:
Accounting communicates financial information to the
internal and external users. It became necessary to develop some principles,
concepts and conventions for making the financial statement understandable. Such
principles, concepts and conventions having wide acceptance give reliability
and creditability to the financial statements. There, these principles,
concepts and conventions must be adopted while recording the transactions in
order to the true result of the business firm. The followings are the
principles, concepts and conventions of accounting: -
(1) Business
entity concept : According this concept, the business unit
or to entity is treated different and distinct from its owners. In accounting
the distinction between owners and the business is made. For example, goods
used from the stock of the business for business purposes are treated as a
business expenditure but similar goods used by the proprietor or owner for his
personal or private use are treated as his drawings. Such distinction between
the owner and the business unit help accounting in reporting profitability more
fairly.
(2) Money
measurement concept : According to this concept, only those
transaction which can be measured in terms
of money or money’s worth are recorded in
the books of accounts. The transaction
which can not be expressed in monetary
value is not recorded in the book of account.
(3) Going
concern concept : Accounting assumes that the business will
continue to exist and carry on its activities for an indefinite period in the future. On the basis of this
assumption, fixed assets purchased are recorded at actual cost and they are
depreciated on the basis of their expected life and not on the basis of their
market value.
(4) Cost
concept : According to this concept, an asset is recorded in the
books of account at the price at which it is acquired or at its cost price, whereas
the real value of the asset changes from
time to time as with the passage of time, value of asset become reduced on account of depreciation charges.
With the passage of time, the market value of fixed assets like land and buildings vary
greatly from their cost. These changes or variations in the value are generally ignored by the
accountant and they continue to value the asset in the balancesheet at cost
price and not at market value.
(5) Accounting
period concept : Though life of a business is perpetual but
still business firm has to report the operating results of the business at the
end of completing a year. Therefore, the whole economic life of the business
firm is divided into periodical intervals which are known as accounting
periods. As the life of business is indefinite but the users of accounting
information want to know the profit and loss and financial position of the firm
without waiting for a long period of
time. So, with the object of communicating financial information the accounting period of one year is determined.
Normally, it is the Calendar year (1st
Baishakh to end of Chaitra) or it may be financial year (1st
Shrawan to end of Ashad).
(6) Realization
concept : According to this concept, income is considered to be
earned when the goods are transferred to the buyer either on cash or on credit
or service rendered. It is ignored
whether price of the goods is received or not. The receiving of order for the
supply of goods is not considered as revenue but when goods are supplied as per
order, revenue is considered to be earned.
(7) Matching concept : Though
the business is a continuous affair yet its continuity is artificially split
into several accounting years for
determining its periodic results. The matching concept requires that expenses,
should be matched to the revenues of the accounting period . So a firm must
determine the revenue earned during a
particular accounting period and the expenses incurred to earn these revenues.
If the expenditure incurred is lesser than the revenue earned, the difference is profit and if the revenue earned is lesser than the expenditure
incurred, the difference is called loss.
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