Basics of Accounting Concepts You Must Know

basic accounting concept

Basics of Accounting Concepts You Must Know

Do you remember the last time you composed an accounting assignment? You might be so indulged that you might not have had a rest for a long time. You might have taken help from friends and teachers to understand the topic, but you might have not realized that it would demand so many sleepless nights to complete.

There can be several reasons behind the unfinished accounting assignments. One possible reason is you might not have understood the basic concepts of accounting.

Why do you need to have basic accounting knowledge to write an assignment?

Did you give a thought to why it took so many sleepless nights to finish when it ought to have been completed in much less time? The issue can be the poor knowledge of fundamental accounting concepts.

A clear understanding of the accounting concept before you actually sit down to write the assignment will help you finish it in time. The absence of such fundamental information can make you feel like a lost man adrift who has no clue where he is going.

The 5 Most Crucial Concepts of Accounting

In our blog, we will give you an insight on the five fundamental ideas of bookkeeping that ought to be understood if you need scholastic achievement.

The main objective is to maintain uniformity and consistency in accounting books. The various accounting concepts are as follows.

Concept of business entity

This concept explains that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are treated as separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense.

Thus, the accounting records are made from the point of view of the business unit and not the person owning the business. This is the fundamental concept of basis of accounting.

Thus, the business entity concept states that business and the owner are two distinct individuals. Accordingly, any expenses incurred by owner or his family from business will be considered as expenses and it will be shown as drawings.

Money measurement concept

This concept assumes that all business transactions must be in monetary terms. Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the accounting books.

Another aspect of this concept is that the records of the transactions are to be kept not in the physical units but in the monetary unit. For example, at the end of the year 2008, an organisation may have a factory on a piece of land measuring 11 acres, office building containing 60 rooms, 60 personal computers, 60 office chairs and tables, 200 kg of raw materials etc. These are expressed in different units. But for accounting purposes they are to be recorded in money terms.

Going concern concept

This concept states that a business firm will continue to carry on its activities for an infinite period of time. In simple terms, it means that every business entity has continuity of life. Thus, it will not be dissolved in the coming future.

This is a necessary assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet; For example, a company purchases a plant and machinery of $110000 and its life span is 20 years. According to this concept every year some amount will be shown as expenses and the balance amount as an asset. Thus, if an amount that is spent on an item which will be used in business for many years, it will not be proper to charge the amount from the revenues of the year in which the item is acquired. Only a part of the value is shown as expense in the year of purchase and the remaining balance is shown as an asset.

Accounting Period concept

All the transactions are recorded in the books of accounts assuming that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals.

This is necessary for various purposes like, calculation of profit, ascertaining financial position, tax computation etc.

Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc. But usually one year is taken as one accounting period which may be a calendar year or a financial year.

Accounting cost concept

Accounting cost concept states that all assets are recorded at the purchase price and not at its market price in the books of accounts, which includes cost of acquisition, transportation and installation.

It implies that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them.

The cost concept is also known as historical cost concept. The effect of cost concept is that an item would not appear in the books of account if the business entity does not pay anything for acquiring an asset. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price.

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