Elaborate on Basic Accounting Concepts

Basic Accounting Concepts:-

1. The Entity Concepts:

A business is an artificial entity distinct from its proprietor(s). A business entity is an economies unit which owns its assets and has its own obligations. The owner(s) may have personal bank accounts, real estate, and other assets, but these will not be considered as assets of the business. A business entity may be in the form of a sole proprietorship concern, partnership, or a corporate entity. In case of a sole proprietary form of business, the sole proprietor is considered fully responsible for the welfare of the entity and, in the eyes of law, the sole proprietor and the business are not considered to have a separate existence. For accounting purposes, however, they are separate entities. A partnership form of business has more than one owner who have “agreed to share profits of a business carried on by all or an of them acting for all”. A corporate entity is a separate legal entity, entirely divorced from its owners (called equity shareholders). A sole proprietorship business normally comes to an end with the expiry of the owner, a partnership firm may cease to operate or, at least, there will be reconstruction of the agreement of the expiry of an owner (called partner) but a corporate entity is not disturbed at all on the expiry of any equity shareholder.

2. Money Measurement Concepts:

Each transaction and event must be expressible in monetary terms. If an event cannot be expressed in monetary terms. It cannot be considered for accounting purpose. Foe example, if you successfully pass a Distance Learning Programme of a university, it will give you a great deal of Satisfaction. But the satisfaction cannot be expressed in monetary terms. Hence such an event is not fit for accounting. On the other hand, if you are robbed of Rs. 1,000 in a train journey, the loss suffered can definitely be expressed in monetary terms. This concepts implies that the legal currency of a country should be used for such measurement.

3. The Cost Concepts:

Assets such as land, buildings, plant and machinery etc. and obligations, such as loans, public deposits, should be recorded at historical cost (i.e., cost as on acquisition). For example, the land purchased by a business entity two years back at a cost of Rs. 10 lakh should be shown, as per the cost concept, at the same amount even today when the current price of the land may have increased five-fold. Thus, the greatest limitation of this concepts is tat it distorts the true worth of an asset by sticking to its original cost.

4. The Going Concern Concepts:

One common argument put forward by the proponents of cost concept is that the assets are shown at its original cost (net of depression) because these are meant for use for a long period of time and not for immediate resale. Therefore, the cost concept rests on the assumption that an entity would continue its operation for a long time. An entity is said to be a going concern if it has neither the intention nor the necessity of the liquidation or considered as one of the fundamental accounting assumptions. The valuation principle of assets and liabilities depend on this concept. If an entity is not a going concern, its assets and liabilities are to be valued in an altogether different manner.

5. The Accrual Concepts:

It suggests that incomes and expenses should be recognized as and when they are earned and incurred, irrespective of whether the money is received or pain in connection thereof. This concept is used by all businesses that disclose their financial statements to various interested parties. In fact, the Companies Act, 1956 provides that accrual concept has to be maintained for practically all purposes. The alternative to the accrual basis of accounting is called ash basis of accounting. The law in India provides that in cases where accrual concept cannot be followed under and circumstances, cash basis may be followed.

6. The Matching Concepts:

The inherent concept involved in accrual accounting is called matching concept. Revenue earned in an accounting year is offset(matched) with all the expenses incurred during the same period to generate that revenue, thus providing a measure of the overall profitability of the economic activity. Thus, matching concept is very vital to measure the financial results of a business. The timing of incurring expensed and earning revenues does not always match. For example, in case of a seasonal business, majority of sales may take place only in four months of a year whereas fixed expenses like salaries, rent etc. are incurred throughout the year. Matching concept suggests that the expenses incurred to generate revenue are to be matched against that revenue to find out the profitability.