In this article, we will learn in-depth about the four (4) important accounting concepts or assumptions and much more.
So let’s get started.
Four (4) Accounting Concepts or Assumptions
The four accounting concepts or assumptions are as follows:
- Business Entity Concept.
- Going Concern Concept.
- Money Measurement Concept.
- Periodical Concept.
1. Business Entity Concept
According to the business entity concept, the institution and the owner are considered as two separate entities.
According to the business entity concept, the owner’s assets and liabilities are not the same as the company’s assets and liabilities. Likewise, the company’s assets and liabilities are not the same as the owner’s assets and liabilities.
The business entity concept says that whatever the owner pays the business entity is counted as the owner’s investment and capital in the business account book, even though the owner owns the business.
Whereas what the owner picks up from the business is considered to be the owner’s withdrawal, i.e., no personal expenses of the owner are recorded as the cost of the business in the book of the business.
Let’s understand the business entity concept with an example: if the owner purchased a “computer” for his personal use, it would be considered the property of the owner and could never be considered an asset of the company, but if a “computer” was purchased for the needs of the organization, it would be considered a property of the business organization.
Based on the business entity concept, the accounting equation A = L + OE is created.
2. Going Concern Concept
According to the “going concern” concept, business organizations will continue indefinitely over the years. In the near future, the business will not be closed. That is, the company will continue to operate its business operations for years without any disruption.
Important note about the “going concern” concept:
- Based on the going concern concept, the value of fixed assets is shown in a financial statement after deducting depreciation from the cost price of fixed assets.
- According to the going concern concept, the assets are shown in the accounts book at the lowest price between the market value of the property and the purchase price.
- As per the going concern concept, the cost is divided into two categories: capital expenses and revenue expenses.
- According to the going concern concept, the assets and liabilities are shown in the financial statement divided into two categories: non-current and current.
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3. Money Measurement Concept
According to the Money Measurement Concept, transactions that can be measured only in money or currency will only be recorded in the books of account. Events that cannot be measured in money or currency will not be included in the books of account.
According to the Money Measurement Concept, all transactions of a business organization are subjected to a common measure of transactions of different natures for the purpose of expressing money or currency, and organized transactions at different times are recorded as money.
4. Periodical Concept
According to the going concern concept, we know that a business organization will continue indefinitely, but at the end of a certain period, each company or its owners want to know the financial results of the company and to calculate the net result and financial condition of the business.
According to the periodical concept, the eternal life of the business company is divided into small parts to calculate the net results and financial condition of the business organization, and this small period is called the accounting period.
The accounting period can be 3 months, 6 months, or 1 year.
According to the periodical concept, the profit and loss and financial statements of the company are prepared.
Adjusting entries are given according to the periodical concept.
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