Accounting concepts form the backbone of the entire accounting system.
They provide a common framework that ensures financial information is recorded consistently, logically, and meaningfully across all types of businesses.
These fundamental principles act as basic assumptions on which the science of accounting rests, helping users understand, compare, and rely on financial statements for decision-making.
Accounting Concepts: The Foundations
Business Entity Concept
This concept treats the business and its owner as two separate legal entities. Personal transactions of the owner are kept completely distinct from business transactions. For example, if an owner purchases a car for personal use, it is not recorded in the business books.
Money Measurement Concept
Only those transactions that can be expressed in monetary terms are recorded in accounting. Events that are important but cannot be measured in money, such as an employee strike, are not included in financial records because they have no direct financial value that can be quantified.
Going Concern Concept
Accounting assumes that a business will continue to operate for the foreseeable future. Based on this assumption, the cost of long-term assets, such as machinery or vehicles, is spread over their useful life instead of being charged as an expense in the year of purchase.
Dual Aspect Concept
Every financial transaction has a dual effect, impacting at least two accounts. This concept forms the basis of the accounting equation:
Assets = Liabilities + Capital,
ensuring that the balance sheet always remains in balance.
Accrual Concept
Under this concept, income and expenses are recorded in the period in which they occur, regardless of when cash is received or paid. For instance, if services are provided in December, the income is recorded in December even if payment is received in January.
