Accounting concepts are the fundamental rules, assumptions and principles that guide how to record business transactions. They form the basis for creating and maintaining books of accounts.
These concepts include the going concern concept, matching principle, accrual basis, cost concept, revenue recognition principle, materiality concept and full disclosure principle. Their purpose is to guarantee that financial statements are reliable, comparable and auditable.
Business Entity Concept
The Business Entity Concept is an accounting principle that states the transactions of a business should be kept separate from its owner’s personal affairs. This implies that any income, expenses, equity, assets and liabilities must remain outside the owner’s account in order to guarantee accurate accounting documents and simpler tax filings.
A business is an organization that produces goods and services at minimal expense, then sells them for profit. The owners, executives, and workers within a company contribute to its success but do not directly receive the profits from these operations.
The management hierarchy may include a Chairman, Board of Directors, Managing Director and section heads who supervise specific business operations. Other administrators and employees carry out specific responsibilities as needed.
Money Measurement Concept
The Money Measurement Concept (MMC) or Measurability Concept is an accounting principle which states that only those events and transactions in a financial statement can be measured or expressed in monetary value. This helps present financial statements in an easy-to-understand and meaningful format.
Comparing the performance of different periods allows investors to get a clear picture of the company’s growth and progress during that period.
Additionally, currency provides a common denominator through which various facts about an entity or organisation can be expressed in monetary terms. This simplifies addition and subtraction operations.
Additionally, it assists in the preparation and presentation of a company’s Profit and Loss Account and Balance Sheet. This concept is utilized by all commercial enterprises worldwide.
Common Unit of Measure Concept
The Common Unit of Measure Concept is an accounting concept designed to make financial statements simpler to comprehend. This is accomplished by requiring all reported currency amounts to be presented in the same currency, regardless of which one was used for certain transactions.
Money is the most commonly used unit of measurement in accounting, serving as a common denominator for financial reporting. However, other units can also be utilized in accounting which offer different perspectives on a company’s performance.
For instance, if two companies each have weekly sales of $20,000 but Company ABC achieves it with four salespeople while Company XYZ utilizes eight, the difference in their performance can reveal a great deal about the two businesses.
Accounting measurements provide a more precise evaluation of a business’ overall health. This gives investors and analysts insight into the true picture of a company, enabling them to compare it against others for comparison purposes.
Dual Aspect Concept
The Dual Aspect Concept is an essential accounting principle that requires the recognition of all aspects of an accounting transaction. Also referred to as the accounting equivalence concept, this principle rests on the idea that businesses cannot truly own anything (assets).
Therefore, when a company receives something, it must record both facts: an increase in assets and liability or capital.
Double-entry accounting is the foundation of double-entry accounting, and auditors must accept it if they are to give their opinions on financial statements.
Every transaction involves two parties, so it’s essential to keep your accounts updated as they occur. Otherwise, you could potentially miss out on valuable revenue opportunities or reduce profitability.
