12. Explain any five Accounting Concepts?
Answers
1. Entity Concept:
For accounting purpose the “business” is treated as a separate entity from the proprietor(s). One can sell goods to himself,, but all the transactions are recorded in the book of the business. This concepts helps in keeping private affairs of the proprietor away from the business affairs. E.g. If a proprietor invests Rs. 1,00,000/- in the business, it is deemed that the proprietor has given Rs. 1,00,000/- to the “business” and it is shown as a “liability” in the books of the business. Similarly, if the proprietor withdraws Rs. 10,000/- from the business, it is charged to them.
2. Dual Aspect Concept:
As per this concept, every business transaction has a dual affect. For example, if Ram starts business with cash Rs. 1,00,000/- there are two aspects of the transaction: “Asset Account” and “Capital Account”. The business gets asset (cash) of Rs. 1,00,000/- and on the other hand the business owes Rs. 1,00,000/- to Ram.
3. Going Business Concept (Continuity of Activity):
It is assumed that the business concern will continue for a fairly long time, unless and until has entered into a state of liquidation. It is as per this assumption, that the accountant does not take into account the forced sale values of assets while valuing them.
4. Money measurement concept:
As per this concept, in accounting everything is recorded in terms of money. Events or transactions which cannot be expressed in terms of money are not recorded in the books of accounts, even if they are very important or useful for the business. Purchase and sale of goods, payment of expenses and receipt of income are monetary transactions which are recorded in the accounting books however events like death of an executive, resignation of a manager are such events which cannot be expressed in money.
5. Cost Concept (Objectivity Concept):
This concept does not recognize the realizable value, the replacement value or the real worth of an asset. Thus, as per the cost concept
a) as asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and
b) this cost is the basis for all subsequent accounting for the asset.
For example, if a machine is purchased for Rs. 10,000/- it is recorded in the books at Rs. 10,000/- and even if its market value at the time of the preparation of the final account is Rs. 20,000/- or Rs. 60,000/- the same will not considered.
Hope it helps you
ANSWER :
❖ Five Accounting Concepts are explained below :-
[1] Business (Accounting) Entity Concept : According to Business Entity or Accounting Entity concept, the owner of a business is always considered as distinct and separate from the business he owns. The term 'Entity' means 'existence' and therefore "accounting entity" means "existence of an accounting unit, i.e. business. As per this concept, business unit should have a complete separate set of books of accounts and the business transactions are recorded from the point of view of the firm, not from the point of view of the proprietor. The proprietor must keep accounts of the business from separately, to enable himself to ascertain profit. He must not mix the transactions of household affairs to that of business affairs. To calculate the profit of the busines, accounts of the business must be kept distinctly without mixing the household transactions or other personal transactions. Every transaction is analyzed from the point of view of the business and not from the point of view of the person who own them, i.e, owner of the business. This is known as Business Entity Concept or Accounting Entity Concept.
[2] Money Measurement Concept : According to Money Measurement Concept, only those events which are capable of beinh expressed in terms of money are recorded in the books of account. The accounting system uses money as its basic unit of measurement. Money is the common unit which enables various things of diverse nature to be added up together and dealth with. Only an event which can be expressed in terms of money is recorded in accounting. If an event, whatever it is important for the business, can not be measured in terms of money, that event will not be recorded in the books of accounts. This concept operates on the assumption that the value of money remains constant throughout the accounting period. The effect if inflation or deflation on the value of money is completely ignored.
[3] Accounting Periodicity Concept : Accounting period refers to the period of time at the end of books of account of business entity are to be closed and financial statement are to be prepared. According to Accounting Periodicity Concept, the life of the business is divided into appropriate segment or period for studying the result shown by the business after its segment or period. This is because, though the life of the business is considered to be indefinite, it would not be helpful in taking corrective steps to the appropriate time by measuring the income and studying the financial position of the business after a very long period. As per this concept, at the end of each accounting period, an Income statement and a balance sheet are prepared by a business. The Income Statement discloses a profit or loss made by the business during the particular accounting period, Again the Balance Sheet depicts the financial position of the business as on the last day of the accounting period.
[4] Going Concern Concept : According to Going Concern Concept, while recording the business transaction in the books of accounts it is assumed that the business will be carried on for a long time to carry out its object. A business entiy possesses assets and owes liabilities which are shown in the balance sheet of the business prepared on the last day of an accounting year. These assets as well as the liabilities of that financial year is carried to the next financial year following the concept of Going Concern. If it is assumed that the business will be closed down the next day or in the near future, then assets would not have been shown at the cost price. Rather these would be shown at but at saleable price or realizable market values. Since while recording transaction and preparing financial statement, the Going Concern Concept is applied, the accountant does not take into account the market price or realizable price of the assets. Books of accounts of a business are carried forward to the following year on the presumption that the business will be carried out in the years to come this is known as Going Concern Concept.
[5] Dual Aspect Concept : According to Dual Aspect Concept, there are dual or two aspect which is effected by each transaction recorded in the books of accounts. This concept is the gery foundation of present accounting mechanism, that is double entry system of bookkeeping. Double entry system states that every transaction are recorded with its two-fold effect in a systematic manner. As per this concept, every business transaction has a double effect or it has two sides. This concept states that at any point of time, the total assets of a business are equal to the total liabilities of an entity. This concept has given birth to the accounting equation which is Total Assets = Total Equities or Assets = Liabilities + Capital.