The Italian Luca Pacioli, recognized as The Father of accounting and bookkeeping was the first person to publish a work on double-entry bookkeeping, and introduced the field in Italy. The modern profession of the chartered accountant originated in Scotland in the nineteenth century. The main purpose of accounting principles is to guarantee that a business’s financial recordings and statements are consistent and to the point.
Accounting concepts are the fundamental ideas, assumptions, and conditions that fortify the accounting process. All business entities record their financial transactions and organize their bookkeeping. It helps a business interpret and integrate a financial transaction into the uniform accounting process.
There are ten main accounting concepts or principles of accounting that we will discuss below.
- Accrual:
Accrual is a fundamental concept that guides how a business can record cash or credit transactions. Under this concept, a business records a financial transaction in the period it occurs. It does not consider whether the business pays or receives cash at the time of the transaction, or if it pays cash after a certain period. For example, a company records a credit purchase at the time of purchase rather than when it pays back the seller. This helps record and report income, expenses, liabilities, and receivables accurately. All modern accounting systems follow the accrual concept in recording financial transactions.
2. Going concern and gone concern:
In accounting parlance, a going concern is a business that is assumed to be able to meet its financial obligations when they become due. In the case of going concern, statutory auditors do not foresee the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period. On the other hand, a ‘Gone Concern’ is a business that is either already in such a liquidation state or is likely to enter soon. The “gone concern” terminology derives from declarations made by financial auditors.
3. Revenue recognition concept:
Revenue recognition is an accounting principle that determines when and how a business records revenue in its financial statements. It’s a core part of accrual accounting and is based on the idea that revenue should be recognized when it’s earned, not when payment is received.
4. Money measurement concept:
The money measurement concept also known as the Measurability Concept, states that a business should only record an accounting transaction if it can be expressed in terms of money. This means that only events and transactions that can be quantified in money are recorded in financial statements.
The money measurement concept is an important accounting concept that is based on the theory that a company should be recording only those transactions that can be measured or expressed in monetary terms on the financial statement.
5. Accounting period concept:
The accounting period concept is the idea that a business should organize its financial activities into specific time intervals for reporting purposes. These time intervals are called accounting periods, and they are used to prepare financial statements and reports.
An accounting period, or reporting period, is often 12 months. There may be different accounting periods for various business tasks.
6. Full disclosure concept
The Full Disclosure Principle states that all relevant and necessary information for the understanding of a company’s financial statements so that the users who can read the financial information are in a better position to make informed decisions regarding the company. Disclosure policies cover revenue recognition, depreciation, inventory, taxes, earnings, stock value, leases, and liabilities.
7. Dual aspect concept
The dual aspect concept is a fundamental accounting principle that states every financial transaction has two equal and opposite effects. The dual aspect concept is the foundation of the double-entry system of bookkeeping, which is now a standard method for auditing and taxation.
8. Materiality concept
The concept of materiality in accounting governs how one recognises a transaction. This accounting principle states that financial information should be included in a company’s financial statements if it could impact the decisions of users of those statements. Based on this concept, an accountant or a business may remove negligible transactions that may not have a bearing on final accounts. The basis for using the materiality concept varies with the size of a company. While a large company may round off figures in the final accounts to crores, a small firm may round off their figures to lakhs.
9. Verifiable objective evidence concept
The verifiable objective evidence concept is also known as the objectivity principle. Under this concept, a business can record only those transactions that they can furnish documentary proof for. Without proper and valid documentary evidence, a transaction can be biased or undependable, and it can increase the scope of financial irregularities.
10. Historical cost concept
The historical cost concept states that a business may record assets and liabilities at their historical cost rather than their current market or sale value. It helps to maintain consistent, reliable, and verifiable financial information. Including the current value of an entity can result in financial irregularities.
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