Accounting Concepts, Principles and Convention

Generally accepted accounting principles refers to the rules or guidelines adopted for recording and reporting of business transaction in order to bring uniformity in the preparation and presentation of financial statements . These principles are referred to as concepts and conventions.

The important accounting concepts are:

  • Business entity concept: It assumes that, the business enterprise and its owner(s) are two separate entities for accounting purpose.
  • Money measurement concept: It states that only those transactions in an organization which can be expressed in terms of money are to be recorded in the books of accounts. Also, records of transactions are to be kept not in physical units, but in monetary units.
  • Going concern concept: It states that a business firm will continue its activities for an indefinite period of time.
  • Accounting period concept: It states that all the business transactions are recorded in the books of accounts on the assumption that profits of transactions is to be ascertained for a specified time period.
  • Accounting cost concept: According to this concept, all assets are recorded in the books of accounts at their cost price not at the market price.
  • Dual aspect concept: It states that every transaction has a dual effect. It is commonly expressed in terms of the fundamental accounting equations (Assets= Liabilities + Capital)
  • Revenue recognition concept: This concept needs that the revenue for a business transaction is considered to be realized when a legal right to receive it arises.
  • Matching concept: This concept highlights that expenses incurred in an accounting period should be matched with revenues during that period. It means the expenses incurred to earn this revenue must belong to the same accounting period.
  • Consistency concept: It states that accounting policies and practices followed by an entity should be uniform and consistent so that results are comparable.
  • Conservation (prudence) Concept: It requires that business transactions should be recorded in such a manner that profits are not overstated. All anticipated losses should be accounted for but all unrealized gains should be ignored.
  • Materiality concept states that accounting should focus on material facts. If the item is likely to influence the decision of a reasonably prudent investor or creditor, it should be regarded as material, and should be disclosed in the financial statements.