explain the various concepst of
Accounting
Answers
. 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.
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❥ Accounting concepts are the necessary assumptions, conditions or postulates upon which the accounting is based. They are developed to facilitate communication of the accounting and financial information to all the users of the financial statements that enables them to interpret the statement in the same meaning and context.
✿ Business Entity Concept
✿ Dual Aspect Concept
✿ Going Concern Concept
✿ Money Measurement Concept
✿ Cost Concept
✿ Accounting Period Concept
✿ Accrual Concept
✿ Matching Concept
✿ Realization Concept
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★ Business Entity Concept :- As per this concept, Business organisations are treated as a separate entity which can be distinguished from the "owners" or stakeholders who provide capital to the business. This concept helps in keeping private affairs of the owners and stakeholders separate from the business affairs.
★ Dual Aspect Concept :- Dual Aspect Concept is the basis for Double Entry System of bookkeeping. All business transactions recorded in accounts have 2 aspects; receiving benefits and giving benefits.
★ Going Concern Concept :- As per this concept it is assumed that the organisations will continue for a long time, unless it is closed as per the law to which it is subject. The financial statements are prepared at the end of each financial year to measure the performance of the entity during that period and not on the assumption of closure or liquidation of the entity.
★ Money Measurement Concept :- In accounting, all the transaction are recorded in term of money. Receipt of income, payment of expenses, purchase and sale of assets etc., are monetary transaction that are recorded in the books if accounts. Whereas, the event of machinery breakdown is not recorded as it does not have a monetary value. However, the expenditure incurred for the repair of the machinery can be measured in monetary value and hence is recorded.
★ Cost Concept :- As per the concept, an asset is ordinarily recorded at the price actually paid or incurred to acquire it, i e., at its cost and this cost becomes the basis for all subsequent accounting treatment for the assets. The assets recorded at cost at the time of purchase mat systematically be reduced through depreciation.
★ Accounting Period Concept :- An Accounting Period is the interval of time, at the end of which the financial statements are prepared to ascertain the financial performance of the business. The preparation of financial statements at periodic intervals helps in taking timely corrective action and developing appropriate strategies. The accounting books are closed at the end of every year either at the end of March or December. As per the Income Tax Act every business unit should prepare financial statements and pay tax on profits every year.
★ Accrual Concept :- Under this Concept, Occurance of claims and obligations in respect of incomes or expenditures, assets or liabilities based on happening of any event, passage of time, rendering of services, are recorded even though actual receipts or payments of money may not have taken place.
★ Matching Concept :- Matching the revenue earned during an accounting period with the cost associated with the period to ascertain the results of the business concern.
★ Realization Concept :- Revenue should be accounted for only when it is actually realized or it has become certain that the revenue will be realized. This signifies that revenue should be recognised only when the services are rendered or the sale is affected.
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