CONCEPT OF FINANCIAL ACCOUNTING:
1.Accounting concept
To know the financial performance and position of the business, a business owner is required to prepare financial statements at the end of a specific period.
Therefore, the period for which such financial statements are maintained is termed as ‘accounting period’.
So, to take important financial decisions, a business owner needs to maintain proper financial statements.
2. Conservatism Concept
The Conservatism Concept of Accounting states that a business owner should preferably understate rather than overstate his business’s net income.
This means that profits should not be recorded until they are realized. However, all losses, including the ones that have less chances of occurring, should be recorded in the books of accounts.
Thus, such a policy helps in dealing with business uncertainties and protects the interests of its creditors.
3. Realization Concept
As per this concept, revenues arising on account of sale of goods or services rendered must be recorded only when they are realized.
Typically, a business would realize revenues at the time of selling goods or rendering of services. This means that a business would realize revenues only when the legal right to receive such revenues arise.
4. Matching Concept
This concept of accounting states that expenses incurred in a particular accounting period should match with the revenues generated during the same period.
This means expenses incurred during a particular period should be deducted from revenue earned during the same period.
5. Consistency Concept
The financial statements help in evaluating the performance of a business only when such results can be compared over a period of time.
Therefore, to make such comparisons possible, businesses need to follow uniform and consistent accounting policies over a period of time.
6. Materiality Concept
Materiality concept states that events that are trivial and have an insignificant impact on the books of accounts can be ignored. Whereas, the material facts that reasonably influence the decisions of the stakeholders of your business must be recorded.
7. Historical Cost Concept
As per this concept, all assets are required to be recorded at their historical cost. This means that assets need to be recorded at their purchase price in books of accounts. Such a price includes the cost of (i) acquisition, (ii) transportation, (iii) installation and (iv) making the asset ready to use.
8. Money Measurement Concept
According to this concept, transactions that can be expressed in terms of money only are recorded in the books of accounts.
Transactions or happenings that cannot be expressed in monetary terms are not recorded in accounting statements.
Furthermore, transactions are recorded in terms of monetary units and not in terms of units of physical quantity.
9. Dual Aspect Concept
This concept states that every transaction has a dual affect and should be recorded in two separate accounts. The dual accounting concept is the foundation for recording transactions in books of accounts. Such a concept is expressed in terms of the following accounting equation: Assets = Liabilities + Capital.
As per this equation, the assets of a business are always equal to the claims of owners and outsiders. The claim of owners is termed as capital (owner’s equity). Whereas, the claims of outsiders are called liabilities (creditors equity). Now, the dual effect of every transaction impacts this equation in such a way that both sides are equal at all times.
The Double Entry System of Accounting is based on this Principle of Duality.
10. Going Concern Concept
This accounting principle assumes that a business will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future.
You must be logged in to post a comment.