Accounting Concepts
From the definition of accounting and bookkeeping in the previous lesson, one could figure out that accounting as a subject matter deals with so many concepts as long as social science is concerned.
- Business Entity Concept
- Money Measurement Concept
- Dual Aspect Concept
- Going Concern Concept
- Accounting Period Concept
- Cost Concept
- The Matching Concept
- Accrual Concept
- Realization Concept
- Balance Sheet Equation concept
Business Entity Concept: Business Entity Concept refers to the concept where it is considered that the owners of the business are separate from the business. All the books of accounts are maintained from the view point of business, not the owners. The owners are treated as the creditors of the company. When the owners injects share capital to the company, this is considered as the business borrows money from the owners which is the liability of the business and the owners will be paid dividends against capital. The business entity concept is applied to make it possible to assess the performance of the business and to assess the performance of the owners.
Money Measurement Concept: Money Measurement Concept states that a business can be recorded only those transactions which is expressed in terms of money. The fact or transactions which can not be expressed in money terms is not recorded in the books of accounts. The limitation of this concept is, some facts may be very important but can not be recorded because that transactions or facts can not be measured in money terms.
Dual Aspect Concept: Every financial transaction to be recorded when it has two aspects. This two aspects is one is debit and one credit. The Dual aspects can presented as follows: Assets = Liabilities + Owners Equity , or Owners Equity = Assets – Liabilities. This is also known as “Accounting Equation.” Here, assets are the resources owned by the business, liabilities represents the outside liabilities that may include Creditors, debenture holders, bank against the assets of the business.
Going Concern Concept: Accounting assumes that a business entity will continue its operation for the foreseeable future. The business will continue for the long time unless there is good evidence to the contrary. It is assumed that there is intention of the management to liquidate its business within a predictable future. Considering this assumption, an accountant while valuing the assets does not consider to sale these assets. However, if the accountant has goods reason to believe that the business,or some part of its is going to be liquidated , or the operation to be ceased (within six month, or year), then the resource of the company to be considered as the current assets. In this respect the guideline is stated in International Accounting Standards (IAS) to be followed.
Accounting Period Concepts: Accounting Period Concept states that the business should be divided into appropriate segments. The life of business is segregated into different period such as 1 year, 6 months etc. to know the performance of the business.
Cost Concept: The Cost Concept states that the business to be recorded the assets at their original purchase price and the cost will be the basis for all the subsequent accounting period. The assets shown in the financial statements will not record at present value rather it will be recorded at cost price. The cost price may be changed subsequently by charging depreciation. Depreciation reduces the profit of each period. The prime purpose of depreciation is to allocate the cost of an asset over its useful life and not to adjust with the profit.
Matching Concept: Matching concept is the concept whereby a company recognize the revenues and expenses in the same accounting period. Company report revenues along with expenses during the period. Matching concepts states that the earnings to be recorded at year wise to avoid misstating of earning. If a company reports revenues for the whole period but expenses not recorded properly, the profit of the company will be overstated.
Accrual Concept: Accrual Concepts states that the income and expenditure will be recorded in the year in which it is incurred, not in the year in which it is received or paid. Thus, accrued income or expenses must be recognized in the year in which it is incurred. The essence of the accrual concept is that net income arises from the events that changes the owner’s equity in a specified period and that these are not necessarily the same as change in the cash position of the business. Thus it helps in proper measurement of income.
Realisation Concept: According to this concept, revenue is considered as earned on the date when it is realised. In other words, revenue realised (either by sale of goods or by rendering services) during an accounting period should only be taken in the income statement (Profit and Loss Account). Unearned/Unrealised revenue should not be taken into account. The revenue is treated as earned on some specific matters or transactions. For example, when goods are sold to customers, they are legally liable to pay, i.e., as soon as the ownership of goods passes from the seller to the buyer. In short, when an order is simply received from a customer, it does not mean that the revenue is earned or realised. On the other hand, when an advanced payment is made by a customer, the same cannot be treated as revenue realised or earned. In case of hire-purchase transactions, however, the title or ownership of the goods is not transferred from the seller to the buyer till the last instalment is paid, As such, the down payments and the instalment received or due should be treated as actual sale, i.e., revenue earned.
Balance Sheet Equation Concept: The Historical Cost Concept needs support of two other concepts for practical purposes, viz. (i) the Money Measurement Concept (already discussed above), (ii) the Balance Sheet Equation Concept. Accounting process, however, conforms to an algebraic equation which, in other words, is involved in two laws of nature, i.e., the law of constancy of matter and the law that every effect originates from a cause.In relation to the former, it may be deducted that all that has been received by us must be equal to (=) all that has been given to us (In accounts, receipts are classified as debits and giving or sacrifices are classified as credits.).Here, the equation comes :Debit = Credit(That is, in other words, every debit must have a corresponding equal credit or vice versa.) All receipts (referred to above) may again be classified into : (i) benefits/services received and totally consumed (which are known as expenses), (ii) benefits or services received but not used properly or misused (which are known as losses) and (iii) benefits or services received but kept to be used in future (which are known as assets). Similarly, in the opposite case, all that have been given by others may also be classified into : (i) What has been given to us but-are not to be repaid (which are known as incomes or gains), and (ii) What has been given by the others but has to be repaid at a later date (which are known as liabilities).Therefore, the above equation may again be rewritten as under:
Expenses + Loss + Assets = Income + Gains + Liabilities
However, if expenses and losses are set off against incomes and gains the same equation will be reproduced in the following form:
Assets = Income + Gains + Liabilities – Expenses – Losses Or, Assets = Net Profit (-) Net Loss + Liabilities
Liabilities become due either to outsider or to the owner, viz. the proprietors, in that case:
Assets = Net Profits or (-) Net Loss + External liabilities + Dues to Proprietors
We know that proprietor’s due increases with the amount of net profit whereas it decreases with the amount of net loss. The same is known as equity in the business.
So, the above-given equation comes down to:
Assets = Equity + External Liabilities Again, from the proprietor’s point of view, the equation can also be rewritten as under:
Proprietor’s Fund or Equity – Assets – Liabilities
E-A-L
From the above, it may be said that the entire accounting process depends on the above accounting equation.
Branches of Accounting
Accounting is vast in nature and revolves every organization or firm. Below are some of the branches of Accounting:
Financial Accounting: It is that branch of accounting, which involves the recording of the transactions, inclined towards the preparation of trial balance and final accounts.
- Cost Accounting: Cost account is the accounting discipline, which deals with costs, i.e. the unit costs of the goods produced and services provided. It helps the management of the organization in fixing the price, controlling costs and providing relevant information for the purpose of decision making.
- Management Accounting: The accounting system which supplies thenecessary information to the management, for rational decision making. The information may be concerned with funds, costs, profits and losses and so forth. This information is helpful in determining the effect of the decisions and analysing the performance of the entity.
- Tax Accounting: The accounting system that deals with the tax return and its payment, instead of preparation of final accounts of the enterprise, is called tax accounting.
- Social Accounting: This branch of accounting is commonly termed as social responsibility accounting. It aims at unveiling the facilities provided by the entity to the society, in terms of medical, housing, education, and so forth.
These accounting branches have been developed as a result of rapid economic development and technological improvements, that increased the company’s scale of operations. Due to this very reason, the management functions has become complicated and resulted in the development of branches.