Q.1 Explain the Various accounting Concepts and Principles?

ACCOUNTING CONCEPTS
The main objective is to maintain uniformity and consistency in accounting records. These
concepts constitute the very basis of accounting. All the concepts have been developed over
the years from experience and thus they are universally accepted rules. Following are the
various accounting concepts:
BUSINESS ENTITY CONCEPT
This concept assumes 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 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 in the books of accounts from the point of view of
the business unit and not the person owning the business. This concept is the very basis of
accounting.
MONEY MEASUREMENT CONCEPT
This concept assumes that all business transactions must be in terms of money,that is in the
currency of a country. In our country such transactions are in terms of rupees. Thus, as per
the money measurement concept, transactions which can be expressed in terms of money
are recorded in the books of accounts. But the transactions which cannot be expressed in
monetary terms are not recorded in the books of accounts.
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.
GOING CONCERN CONCEPT
This concept states that a business firm will continue to carry on its activities for an
indefinite period of time. Simply stated, it means that every business entity has continuity of
life. Thus, it will not be dissolved in the near future. This is an important assumption of
accounting, as it provides a basis for showing the value of assets in the balance sheet. Thus,
if an amount 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 on the assumption 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 different 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. Year that begins from 1st of January
and ends on 31st of December, is known as Calendar Year. The year that begins from 1st of
April and ends on 31st of March of the following year, is known as financial year. As per
accounting period concept, all the transactions are recorded in the books of accounts for a
specified period of time. Hence, goods purchased and sold during the period, rent, salaries
etc. paid for the period are accounted for and against that period only.
ACCOUNTING COST CONCEPT
Accounting cost concept states that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation and installation and not at
its market price. It means that fixed
assets like building, plant and machinery, furniture, etc are recorded in the books of
accounts at a price paid for them.
DUAL ASPECT CONCEPT
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of
recording business transactions in the books of accounts. This concept assumes that every
transaction has a dual effect, i.e. it affects
two accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. It means, both the aspects of the transaction must be recorded in
the books of accounts.

REALISATION CONCEPT
This concept states that revenue from any business transaction should be included in the
accounting records only when it is realised. The term realisation means creation of legal
right to receive money. Selling goods
is realisation, receiving order is not. In other words, it can be said that : Revenue is said to
have been realised when cash has been received or right to receive cash on the sale of
goods or services or both has been created.
ACCRUAL CONCEPT
The meaning of accrual is something that becomes due especially an amount of money that
is yet to be paid or received at the end of the accounting period. It means that revenues are
recognised when they become receivable. Though cash is received or not received and the
expenses are recognized when they become payable though cash is paid or not paid. Both
transactions will be recorded in the accounting period to which they relate. Therefore, the
accrual concept makes a distinction between the accrual receipt of cash and the right to
receive cash as regards revenue and actual payment of cash and obligation to pay cash as
regards expenses.
The accrual concept under accounting assumes that revenue is realised at the time of sale
of goods or services irrespective of the fact when the cash is received.
MATCHING CONCEPT
The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period. So once the revenue is realized, the
next step is to allocate it to the relevant accounting
period. This can be done with the help of accrual concept.
Principle of accounting
Since GAAP is founded on the basic accounting principles and guidelines, we can
better understand GAAP if we understand those accounting principles. The table below lists
the ten main accounting principles and guidelines together with a highly condensed
explanation of each.
Economic Entity Assumption
The accountant keeps all of the business transactions of a sole proprietorship
separate from the business owner's personal transactions. For legal purposes, a sole
proprietorship and its owner are considered to be one entity, but for accounting purposes
they are considered to be two separate entities.
Monetary Unit Assumption
Economic activity is measured in U.S. dollars, and only transactions that can be
expressed in U.S. dollars are recorded. Because of this basic accounting principle, it is
assumed that the dollar's purchasing power has not changed over time. As a result
accountants ignore the effect of inflation on recorded amounts. For example, dollars from a
1960 transaction are combined (or shown with) dollars from a 2010 transaction.
Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash
or the cash equivalent) when an item was originally obtained, whether that purchase
happened last year or thirty years ago. For this reason, the amounts shown on financial
statements are referred to as historical cost amounts. Because of this accounting principle
asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset
amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount
does not reflect the amount of money a company would receive if it were to sell the asset at
today's market value. (An exception is certain investments in stocks and bonds that are
actively traded on a stock exchange.) If you want to know the current value of a company's
long-term assets, you will not get this information from a company's financial statements—
you need to look elsewhere, perhaps to a third-party appraiser.
Matching Principle
This accounting principle requires companies to use the accrual basis of accounting.
The matching principle requires that expenses be matched with revenues. For example,
sales commissions expense should be reported in the period when the sales were made (and
not reported in the period when the commissions were paid). Wages to employees are
reported as an expense in the week when the employees worked and not in the week when
the employees are paid. If a company agrees to give its employees 1% of its 2010 revenues
as a bonus on January 15, 2011, the company should report the bonus as an expense in
2010 and the amount unpaid at December 31, 2010 as a liability. (The expense is occurring
as the sales are occurring.) Because we cannot measure the future economic benefit of
things such as advertisements (and thereby we cannot match the ad expense with related
future revenues), the accountant charges the ad amount to expense in the period that the
ad is run.

Revenue Recognition Principle

Under the accrual basis of accounting (as opposed to the cash basis of accounting),
revenues are recognized as soon as a product has been sold or a service has been
performed, regardless of when the money is actually received. Under this basic accounting
principle, a company could earn and report $20,000 of revenue in its first month of
operation but receive $0 in actual cash in that month.
Materiality
Because of this basic accounting principle or guideline, an accountant might be
allowed to violate another accounting principle if an amount is insignificant. Professional
judgment is needed to decide whether an amount is insignificant or immaterial.