Question

1. Define Accounting. Explain the accounting concepts which guide the accountant at the recording stage.

Answer 1

 Accounting is defined by the American Accounting Association as “The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”

Accounting concepts:

·        Business entity concept:  Financial transactions of a business and its owner are treated separately.

·        Money measurement concept: In accounting, the recorded transactions are the business transactions that are expressed in terms of money.

·        Dual aspect concept: For every credit, a corresponding debit is made. The recording of a transaction is complete only with this dual aspect.

·        Going concern concept: In accounting, a business is anticipated to exist for a long time while fulfilling its commitments and obligations. This means that the business will liquidate its assets at “fire-sale” prices.

·        Cost concept: In the first year of accounting, based on the original cost, the fixed assets of a business are recorded. Subsequently, depreciation is excluded while recording. On fixed assets, the rise or fall of market price is excluded.

·        Accounting year concept: Each business chooses a specific time period to complete a cycle of the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar year.

·        Matching concept:  In a given accounting period, it is expected that for every entry of revenue recorded there should be an equal expense entry for calculating profit or loss.

·         Realization concept: Profit is recognized only when it is earned. For example: Any advance is not considered unless the product is delivered to the customer.