What are Accounting Concepts & Principles

Accounting Concepts & Principles, In this post, we are going to know about important basic Accounting Concepts, Principles, and conventions and will observe their implications while recording transactions and events. Accounting Concepts such as

Accounting Concepts & Principles

To avoid confusion and to achieve uniformity, the accounting process is applied within the conceptual framework of ‘Generally Accepted Accounting Principles(GAAPs). The term GAAPs is used to describe rules developed for the preparation of the financial statements and are called concepts, conventions, postulates, principles, etc. These GAAPs are the backbone of the accounting information system, without which the whole system cannot even stand straight.

What are Accounting Concepts?

  1. The word concept means idea or notion, which has universal application.
  2. And Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared.
  3. And certain concepts are perceived, assumed, and accepted in accounting to provide a unifying structure and internal logic to the accounting process.
  4. So the Financial transactions are interpreted in the light of the concepts, which govern accounting methods.
  5. Concepts are those basic assumptions and conditions, which form the basis upon which the accountancy has been laid.
  6. Unlike physical science, accounting concepts are the only result of broad consensus. These accounting concepts lay the foundation on the basis of which the accounting principles are formulated.

How many types of Accounting Concepts?

Now we shall know in detail the various accounting concepts on which accounting is based. The following are the widely accepted accounting concepts:

  1. Entity concept: The entity concept states that a business enterprise is a separate identity apart from its owner. Accountants should treat a business as distinct from its owner. Business transactions are recorded in the business books of accounts and the owner’s transactions in his personal books of accounts.
  2. Money measurement concept: As per this concept, only those transactions, which can be measured in terms of money are recorded. Since money is the medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of  being measured in terms  of money be only be recorded in the books of accounts
  3. Periodicity concept: This is also called the concept of the definite accounting period. As per the going concern concept, an indefinite life of the entity is assumed. For a business entity, it causes inconvenience to measure performance achieved by the entity in the ordinary course of business.
  4. Accrual concept: Under the accrual concept, the effects of transactions and other events are recognized on a mercantile basis means when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
  5. Matching concept: In this concept, all expenses matched with the revenue of that period should only be taken into consideration. In the financial statements of the organization if any revenue is recognized then expenses related to earning that revenue should also be recognized.
  6. Going Concern Concept: The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future.
  7. Cost concept: By this concept, the value of an asset is to be determined on the basis of historical cost, in other words, acquisition cost.
  8. Realization concept: It closely follows the cost concept. Any change in the value of an asset is to be recorded only when the business realizes it.
  9. Dual aspect concept: This concept is the core of double-entry book-keeping. Every transaction or event has two aspects.
  10. Conservatism Concept: Conservatism states that the accountant should not anticipate any future income however they should provide for all possible losses. When there are many alternative values of an asset, an accountant should choose the method which leads to the lesser value.
  11. Consistency Concept: In order to achieve comparability of the financial statements of an enterprise through time, the accounting policies are followed consistently from one period to another; a change in an accounting policy is made only in certain exceptional circumstances.
  12. Materiality Concept: The materiality principle permits other concepts to be ignored if the effect is not considered material. This principle is an exception to the full disclosure principle.

What are Accounting Principles?

Accounting principles are a set of beliefs commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist.

Accounting conditions to be satisfied-

  1. Should be based on real assumptions
  2. Must be simple, understandable, and explanatory;
  3. Must be followed consistently;
  4. And should be able to reflect future predictions;
  5. And should be informative for the users.

What are the types of Accounting Principles?

Accounting Principles involve accounting concepts and accounting conventions. For you to understand the accounting principles, you need to know these accounting concepts and conventions. Some of the most fundamental accounting principles include the following:

  1. Accrual principle
  2. Conservatism principle
  3. Consistency principle
  4. Cost principle
  5. Economic entity principle
  6. Full disclosure principle
  7. Going concern principle
  8. Matching principle
  9. Materiality principle
  10. Monetary unit principle
  11. Reliability principle
  12. Revenue recognition principle
  13. Time period principle

What are Accounting Conventions?

  1. Accounting conventions are the surface of accounting practices, commonly known as accounting principles, adopted by various organizations over a period of time.
  2. These conventions are obtained by usage and practice.
  3. The accountancy bodies of the world may change any of the conventions to improve the quality of accounting information. Accounting conventions need not have universal application.

What are the types of Accounting Conventions?

After accounting concepts, the next important part of accounting principles is accounting conventions. Accounting conventions refer to a set of customs and traditions that guide the business in preparing the accounting statement. These conventions are derived by usage and practice. The following are the accounting conventions:

  1. Consistency: consistency is a fundamental assumption that states accounting practices and policies are consistent from one period to another.
  2. Full disclosure: This convention as part of accounting principles implies that the accounts should be prepared in a manner that all material information is clearly disclosed.
  3. Conservatism: This convention takes into consideration all prospective losses and leaves all prospective profits until they are earned.
  4. Materiality: In the materiality principle, all the items having a significant economic effect on the business should be disclosed in the financial statement. All unimportant items are either ignored or merged with other items.

What are fundamental Accounting assumptions?

There are three fundamental accounting assumptions :

  1. Going Concern
  2. Consistency
  3. Accrual

If nothing has been written about the fundamental accounting assumption in the financial statements then it is assumed that they have already been followed in their preparation of financial statements. However, if any of the above-mentioned fundamental accounting assumptions is not followed then this fact should be specifically disclosed.

What is the difference between Accounting concepts and Accounting Conventions?

These are the basic differences between Accounting concepts and Accounting Conventions

S.noAccounting ConceptsAccounting Convention
1.Refers to a set of rules and assumptions to be followed while recording financial transactions.This refers to generally accepted practices followed by the accountants.
2.The accounting bodies of the country set the rules and assumptions to be followed, generally in line with internationally accepted accounting policies.Conventions are basically the implied accounting practices followed by an entity. The same is not governed by any accounting authority; however, there is a general agreement between the accounting bodies for acceptance of the conventions in practice.
3.To be followed at every step of recording the transactions of the business.To be followed while preparing financial statements of the entity.
4.It is a theoretical approach for the preparation and maintenance of books of accounts.It is a procedural approach that comes into picture post books that are prepared.

What are Financial Statements?

The financial statements are basic means through which the management of an entity makes public communication of the financial information along with selected quantitative details. They are structured financial representations of the financial position and the performance of an enterprise.

What are the characteristics of Financial Statements?

These are the qualitative characteristics of Financial Statements-

  1. Understandability
  2. Relevance
  3. Reliability
  4. Comparability
  5. Materiality
  6. Faithful Representation
  7. Substance over Form
  8. Neutrality
  9. Prudence
  10. Full, fair, and adequate disclosure
  11. Completeness

Further Faqs for Accounting concepts & Principles

Other related faqs for accounting concepts and quiz

What is the List of accepted accounting concepts?

List of accepted accounting concepts
(a) Entity concept
(b) Money measurement concept
(c) Periodicity concept
(d) Accrual concept
(e) Matching concept
(f) Going Concern concept
(g) Cost concept
(h) Realisation concept
(i) Dual aspect concept
(j) Conservatism
(k) Materiality

What are the three fundamental accounting assumptions?

Three fundamental accounting assumptions :
1. Going Concern
2. Consistency
3. Accrual

What is the full form of GAAP?

Generally Accepted Accounting Principles.

What is the importance of the Accounting Concept?

The importance of the accounting concept is visible in the fact that its application is involved at each and every step of recording a financial transaction of the entity. Following the generally accepted accounting concepts helps in saving time, effort, and energy for the accountants, as the framework is already set. It improves the quality of financial statements and reports with respect to the understandability, reliability, relevance, and comparability of such financial statements and reports.

What is an Accounting standard?

Accounting standard refers to the set of rules, guidelines, and principles framed by the regulatory body or the government that acts as a framework for accounting policies and practices. In the United States, the Generally Accepted Accounting Principle, also known as GAAP, is an accounting standard that must be followed while presenting and preparing financial statements. Generally, accounting standards are established to ensure transparency of accounting professionals and consistency in accounting principles followed by organizations. All countries have their own accounting standards framed by the regulatory body or the government. However, these standards may vary from one country to another.

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