Basic Accounting Concepts or Principles

Accounting is related with the recording, classifying and summarizing the financial transactions to know the profitability and financial positions of a business. To know the profitability and financial position of a business, different types of financial statements are to be prepared. These financial statements are to be prepared on the basis of certain assumptions, concepts and principles which are known as basic accounting concepts or principles. The fundamental concepts and principles of accounting are known as Generally Accepted Accounting Principles (GAAP). The following are the main concepts or principles:

Business Entity Concept

This concept states that the business and its owners are two separate and distinct entities. For accounting purpose, every business enterprises are treated as a separate entity which is distinct from its owner. The financial transactions are to be recorded from the view point of the business and not from the view point of its owner. Such distinction is essential to ascertain the true financial picture of the business.

This concept states that the business is established to continue its transactions over a long period of time. All the business makes capital expenditures such as the purchase of building, land and machinery which are recorded in the books assuming that these assets will be used over a long a period of time.

Money Measurement Concept

Money measurement concept states that only those transaction which can be measured and expressed in term of money are recorded in the books of accounts. This concept assumes that only those transaction which can be measured and expressed in term of monetary value i.e. Rupee, Dollar, etc.have to be taken into account.Under this concept, all the business transactions relating to goods, assets and liabilities are to be recorded in their monetary value.

Accounting period Concept

Accounting period concept implies that the total life of the business is divided into different imaginary time interval and such time interval contain 12 months for the purpose of recording and reporting the financial performance to the concerned parties. Each time travel interval contains normally one year which is known as accounting period. In Nepal, accounting period begins on 1st Shawan of every year and ends on the last day of Ashadh of the next year. At the end of accounting period, financial statements are prepared to determine the profit or loss and financial position of the business.

Realisation Concept

This concept states that revenue is assumed to be earned when goods are sold or services rendered to the customers either on cash or credit. It is not compulsory that revenue must realize in cash at the time of selling goods and rendering services. At the end of the year, there may be outstanding expenses and accrued incomes. Such expenses and incomes should be considered while preparing financial statements.

Cost concept

This concept implies that when the fixed assets are purchased they are to be recorded in the books of accounts at their cost price. The valuation of the assets is not made on its market price. The balance sheet always shows the value of fixed assets after deducting the amount of depreciation from their cost price.

Matching Concept

This concept is a guideline for determining the profit or loss of a business. According to this concept, the revenue earned has to be compared with the expenses incurred in the same period to determine the true profit or loss of the business. If the amount of revenue is more than expenses, the result is net profit but if the amount of revenue is less than expenses, the result is a net loss.

Dual Concept

This concept states that every business transaction has two-fold effects. When the transaction is performed, its effect is made on two different accounts. If one account is debited; another account must be credited with the equal amount. This concept of duality in transactions always equalizes the assets and liabilities in the balance sheet.