Basic Accounting Concepts or Assumption

Basic Accounting Concepts or Assumptions ( Unit 1:Book Keeping and Accounting Concept)  Grade:XI   ? by: Megh Nath Sapkota

Basic Accounting Concepts or Assumption

Accounting concept refers the basic accounting rules and assumptions for recording the financial transactions. Without accounting concept we cannot keep systematic and proper accounting. International Accounting Standard Committee (IASC) recognizes several concepts of accounting which are commonly used all over the word. Hence, these concepts are called “Generally Accepted Accounting Principles (GAAP). Some of the basic accounting concepts or assumptions are as follows:

&. Business Entity Concept (Assumption)

According to this concept, the business organization and the owner of the business are two separate and distinct entities. So, all transactions of business are recorded in the book of account of business organization not in the book of account of proprietor (or owner). By this concept, a business has nothing to do with the personal transactions of owners. The distinction between the business and owner is essential in order to ascertain the true picture of business. If the two are not separated for accounting purpose of a business cannot obtained.

&.  Going Concern Concept (Assumption)             

According to this concept, a business is considered as a going concern. It means the business has an indefinite life and it exist for a long period of time or business continues to exist forever. All the business transactions are performed and recorded from this point of view. Long term expenditures such as purchase of land, building and machinery that the business make are recorded in the book of account assuming that it will exist and run for a long period of time. Such fixed assets are recorded in their original cost and depreciation is charged on the assets without considering their market value. Therefore, balance always shows fixed assets at cost after deducting depreciation. Similarly, outstanding expenses and income as well as prepaid expenses and advance incomes are taken in the account while preparing final account.

&. Money Measurement Concept (Assumption)

Money measurement concept assumes that only those business transactions that are measured and expressed in monetary terms have to be taken in account. It is so assumed because money provides common measure of different goods, services, assets and liabilities. In other words, the transaction or business activities, which cannot be measured in money value, are not included in accounting. It records only those transaction, which can be expressed in money values i.e. rupees, dollar etc.

&. Accounting Period Concept (Assumption)

Accounting period concept implies that for the purpose of reporting financial transactions, the whole life of the business is divided in to imaginary time intervals. Such time interval is called accounting period, which is normally of one year. In Nepal, it begins on the 1^st Shrawan every year and ends on the last day of Asadh the next year. At the end of accounting period (year), financial statements are drawn to ascertain profit or loss and financial position of the business and are reported to their user, manager, creditors. The length of accounting period depends on nature of business.

&. Revenue Realization Concept (Assumption)

This concept is also called revenue concept or realization concept only. According to this concept, the revenue is assumed to be earned when it is realized and revenue is realized when the goods are transferred to the buyers and services are provided to the clients for cash or for assets or anticipation of realizing value of sales on future date. It is not necessary that the revenue must be realized in cash. It is not considered as being realized on the date on which goods or services are transferred to customers and becomes legally liable o pay for it.

&. Cost Concept (Assumption)

This concept is related with going concern concept. According to this concept, the cost of goods and services are recognized when they are incurred and recorded as their cost but not when the cash is paid for it. The cost is assumed to be incurred when the services or the asset is used to generate revenue. Similarly, fixed costs are recorded in the book of account at the cost of its purchase not at its market value. This concept, however, does not mean that the cost of purchase appears in the book every year. Since, an asset has a limited life; its cost is written off every year over its life. Thus the book shows the assets at purchasing cost less its depreciation up to date.

&. Matching Concept (Assumption)

Matching concept means matching the cost with revenue. This concept provides guidelines as to how the profit or loss of the business should be ascertained. This concept, therefore, states that the revenue earned in the period has to be matched with the expenses incurred in the same period so as to find out the true profit or loss of the business. Any expenses or revenue of the previous year or next year should not be matched with those of this year. If they are matched the true profit or loss cannot be ascertained. If the revenue exceeds the expenses, the resultant figure will be profit. But if expenses are more the difference will be loss. So, according to this concept, profit pr loss of the business is determined by comparing revenue earned with the expenses incurred.

The fundamental assumptions on which accounting are based are known as basic accounting concepts. The important basic concepts are as follows:

v  Business Entity Concept states that the business organization and the owner of the business are two separate and distinct entities. If the two are not separated for accounting purpose of a business cannot obtained.

v  Going Concern Concept implies that a business has an indefinite life and it exist for a long period of time or business continues to exist forever. All the business transactions are performed and recorded from this point of view.

v   Money Measurement Concept assumes that only those business transactions that are measured and expressed in monetary terms have to be taken in account. In other words, the transaction or business activities, which cannot be measured in money value, are not included in accounting.

v  Accounting Period Concept implies that for the purpose of reporting financial transactions, the whole life of the business is divided in to imaginary time intervals. Such time interval is called accounting period, which is normally of one year. The length of accounting period depends on nature of business.

v  Revenue Realization Concept states that the revenue is assumed to be earned when it is realized and revenue is realized when the goods are transferred to the buyers and services are provided to the clients for cash or some other considerations.

v  Cost Concept implies that the cost of goods and services are recognized when they are incurred and recorded as their cost but not when the cash is paid for it.

v  Matching Concept states that the revenue earned in the period has to be matched with the expenses incurred in the same period so as to find out the true profit or loss of the business.