S4/S3(2020) 810/1 principles of accounts notes.

(To be written at the back of their books or in a separate book to avoid mixing up issues)

Accounting concepts, principles and conventions

Basic accounting concepts are the generally accepted rules andconventions by accountants in
practice.They are the principles that must be followed when preparing and reporting financial
information.

They include the following:

Business entity concept

This rule requires that the business is treated as a separate legal entity from the owners.The private
transactions of the owners do not concern the business and should not be taken into account when
preparing the business’financial statements.

Dual concept

This concept suggests that every transaction must be recorded twice since there are two parties in every
transactions i.e the seller and the buyer. This is the basis for the principle of double entry.

Monetary concept (monetary measurement)

This principle states all transactions must be recorded in monetary terms. This concept suggests that
money is the common denominator. Even in the case of Barter trade, where goods and services are
directly exchanged for other goods and services, monetary value must be attached to the items involved
in these trades.

Going concern

This concept states that the accounts are prepared on the assumption and understanding that the
business will continue in operation in the future. It assumes that is not on the verge of collapse, unless
there is evidence to suggest so. This is the basis of having the accounting cycle.

Historical cost concept (originalcost)

This concept suggests that in accounting, assets must be recorded at their acquisition costs even if their
values have subsequently increased or decreased. In the same way, liabilities are also recorded at the
actual cost when they were incurred although their real values can change due to currency reforms,
inflation, devaluation, etc.

Consistency concept
This principle states that once the business chooses and uses a particular accounting method or policy, it
must be used continuously and consistently without changing to any other. This prevents confusion and
allows the accounts from one period to be compared with another period.

Matching concept

This concept requires accurate matching of expenses against income, by only writing off expenses that
were incurred in generating income in the accounting period. Any expense that relates in part to outside
the accounting period should be adjusted, so that the element that does not relate to the accounting
period is excluded from the financial statements for that period. This concept is very important in the
preparation of the income statement.

Prudence concept

This concept requires accountants to follow a procedure that provides a fair view of the business
financial position. I.e. not to overstate assets or understate liabilities.

Under this concept one should not anticipate revenue and profits until realized but should make a
provision for all possible losses, and should also explain why prepayments are deducted. In other words
this concept ensures that assets and incomes are not overstated and liabilities or expenses are not
understated.

Objectivity concept

This concept states that there must be evidence for the figures recorded in the books of accounts and
the financial statements. This means that there must be original documents with details of the
transactions such as invoices or that accountants must state the basis for arriving at the figures.

In other words all financial transactions must be backed up by documentary evidence.

Realization concept

This concept requires accountants to recognize income as earned only when the sale has been made
and the goods have been actually accepted by the buyers or when services have been offered and
accepted by customers.

Accrual concept

This concept requires accountants to record all income earned by the business even if it has not yet
been actually received. For example the business may make a sale on credit terms and still be owed
money by the customer. The income that has not been received by the business is recorded as an asset
(normally called accrued income). Similarly all expenses that have been incurred by the business should
be recorded even if they have not been paid. Any expenses incurred by the business but have not
actually been paid are called accrued expenses. These expenses are recorded as a liability on the
balance sheet.