Following are the various accounting concepts that have been discussed in the following

sections:

1. Business entity concept

2. Monetary concept
3. Going concern concept
4. Accounting period concept
5. Accounting cost concept
6. Realisation concept
7. Matching concept

1. Business entity concept:

The business entity has many of persons and bodies. They include owners, shareholders,
and partners in case of partnership firms and proprietor in case of proprietary concerns.
According to this concept, the proprietor and his business are considered as separate
parties. So any amount of invested by proprietor in the business becomes an obligation of
the business. Amount invested in business is called as capital. Capital is refundable to
proprietor on closure of the business. Any profit earned in the business by proprietor is
reward on capital of proprietor. So profit is also a liability of business. Any amount drawn by
proprietor from the business for personal use is called as drawings. It reduces capital of
proprietor. Any personal transaction which does not affect business cannot be recorded in
books of accounts of business. Entity concept is applicable to all organisations from
accounting point of view.

Significance:
The following points highlight the significance of business entity concept :
 This concept helps in ascertaining the profit of the business as only the business
expenses and revenues are recorded and all the private and personal expenses are
ignored.
 These concept restraints accountants from recording of owner’s private/ personal
transactions.
 It also facilitates the recording and reporting of business transactions from the
business point of view
 It is the very basis of accounting concepts, conventions and principles.

2. Monetary concept:
Financial accounts records only transactions i.e. transactions which can be expressed in
terms of money. Non-monetary transactions cannot be recorded or expressed in terma of
money. So such records cannot be recorded in accounts.
Significance:
The following points highlight the significance of money measurement concept :
 This concept guides accountants what to record and what not to record.
 It helps in recording business transactions uniformly.
 If all the business transactions are expressed in monetary terms, it will be easy to
understand the accounts prepared by the business enterprise.
 It facilitates comparison of business performance of two different periods of the
same firm or of the two different firms for the same period.

3. Going concern concept:

A business organization is a going concern. It has a continuous life the proprietor assumes
that business activities will be continued year after year and there is no intention to close
down business after certain period. As business is going concern huge amount is invested by
proprietor in business. Companies spend on training of employees. Provisions is made for
replacement of permanent assets. Distinction is made between purchase of goods and
purchase of work.

Significance:
The following points highlight the significance of going concern concept;
 This concept facilitates preparation of financial statements.
 On the basis of this concept, depreciation is charged on the fixed asset.
 It is of great help to the investors, because, it assures them that they will continue to
get income on their investments.
 In the absence of this concept, the cost of a fixed asset will be treated as an expense
in the year of its purchase.
 A business is judged for its capacity to earn profits in future.

4. Accounting period concept:

A business organization has continuous life correct profit or loss cannot be calculated
unless, business is closed. Proprietor cannot wait indefinitely to find profit and loss. Thus
entire life of organization is divided into small accounting periods. Each accounting period
consist of 12 months which is also known as accounting year. So all organisations prepare
their financial statements at the end of the year.

Significance:
 It helps in predicting the future prospects of the business.
 It helps in calculating tax on business income calculated for a particular time period.
 It also helps banks, financial institutions, creditors, etc to assess and analyse the
performance of business for a particular period.
  It also helps the business firms to distribute their income at regular intervals as
dividends.

5. Accounting cost concept:

According to this concept, all transactions are recorded in books of accounts at cost. Cost is
sacrifice made to obtain anything. Cost is basis of future transactions also.
It is of interest to note that since assets are recorded at acquisition cost, as a rule any
subsequent increase or decrease in their values would not be recorded in the balance sheet.
An exception to this is the diminution in value arising from depreciation of assets.

Significance:
 This concept requires asset to be shown at the price it has been acquired, which can
be verified from the supporting documents.
 It helps in calculating depreciation on fixed assets.
 The effect of cost concept is that if the business entity does not pay anything for an
asset, this item will not be shown in the books of accounts.

6. Realisation concept:
Profit is considered to have been earned when goods are actually realised and it is realised
when goods are actually sold out. Sale of goods may be on cash basis or on credit basis. It
also refers to inflow of assets in the form of receivables. The term realisation means
creation of legal right to receive money. Selling goods is realisation, receiving order is not.
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.

Significance:
 It helps in making the accounting information more objective.
 It provides that the transactions should be recorded only when goods are delivered
to the buyer.

7. Matching concept:
This concept is applied for determining of profit or loss. Profit and loss is decided by
matching revenue income for year with revenue expenses for the year. Excess of revenue
over the revenue expenses is called the profit. And expenses excess over revenue income is
loss. Revenue expenses are recurring expenses and revenue income is recurring income.
Before matching income with expenses it is necessary to find out income and expenses for
the year. So any expenses and incomes relating to next year should not be considered. But
any income for year which are payable must be considered for deciding profit and loss.
All adjustments in financial statements are applications of matching concept.

Significance:
 It guides how the expenses should be matched with revenue for determining exact
profit or loss for a particular period.
 It is very helpful for the investors/shareholders to know the exact amount of profit
or loss of the business.