Major Accounting Concepts

ACCOUNTING CONCEPTS INCLUDE THE FOLLOWING

The Business Entity Concept

This states that, for the purposes of accounting, a business should be considered as an entity distinct from its owners. For this reason, transactions affecting the private life of the owner(s) are recorded as such and not in the businesses’ name.

The Matching or Accruals Concept

This concept states that, as far as possible, the revenue or income and expense that relates to a particular accounting season should be matched together when calculating and loss, irrespective of whether cash was received or paid. Therefore in calculating the profit of a particular period, the revenue earned in the period should be matched with the expenditure relating to the period irrespective of cash flow.

Going concern Concept        

This concept assumes that a business will continue its operation for the foreseeable future without the intention of ending business operation or liquidating.

Prudence Concept

This can also be called the conservative concept. It states that provisions should be made for possible future losses but not for profit. It is a concept which prohibits an accountant from providing for profits.

Consistency Concept

This states that, methods or policies applied in preparing and presenting financial statements should as much as possible be maintained for some years except where it is very necessary to change it. This makes comparability easier. 

Materiality Concept

This states that financial accounting information should be material. Information is said to be material if its capable of changing managements decision.

The Money Measurement Concept

This states that accounts should deal with items capable of being quantified in monetary value.  Financial information should be measurable in terms of money.

The Realisation Concept

This states that revenue and profit should be recognized in the accounts when realised in the form of cash or other assets. This means that, it is not only when cash is received that we say income has been earned but when other assets are also realized.

The Duality Concept

This states that every transaction must have two effects on the accounts. That is, one account should be debited and another account credited.  It states that every debit entry must have a corresponding credit entry and every credit must also have a corresponding debit entry.

The Historical Cost Concept

This demands that transactions are recorded at the original cost when they occurred. That is assets are recorded at the amount of cash or cash equivalent paid, or the fair value of the consideration given for them. Also liabilities are recorded at the amount of proceeds received in exchange for the obligation.

SAMPLE QUESTIONS

1. a. Define Financial Accounting.

    b. Highlight five accounting concepts.