In this article, we will learn in-depth about the four (4) important accounting concepts or assumptions and much more.
Four (4) Accounting Concepts or Assumptions
4 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.
The properties and liabilities of the company are not considered to be the properties and liabilities of the owner at the same time properties and liabilities of the owner are not considered to be the properties and liabilities of the business as per the business entity concept.
According to the business entity concept, whatever the owner pays to the business entity is considered the owner’s investment and capital in the book of business account book, while the business is owned by the owner.
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, it could never be considered as an asset of the company, but if a “computer” was purchased for the needs of the organization, it would be considered as 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 organization 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 going concern concept
- Based on the going concern concept, the value of fixed assets 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.
- The cost is divided into two categories: capital expenses and revenue expenses as per the going concern concept.
- According to the going concern concept, the assets & 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 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 Money Measurement Concept, all transactions of a business organization are subjected to a common measure of transactions of different nature 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 & loss and financial statements of the company are prepared.
Adjusting entries are given according to the periodical concept.
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