Accounting Concept

Business Entity Concept

The business entity concept states that the transaction associated with a business must be
separately recorded from those of its owners or other businesses. In other words, while
recording transactions in a business, we take into account only those events that affect that
particular business; the events that affect anyone else other than the business entity are not
relevant and are therefore not included in the accounting records of the business. This concept is
very important because if transactions of a business are mixed up with that of its owners or other
businesses, the accounting information would lose its usability.

The business entity concept of accounting is applicable to all types of business organizations
(i.e., sole proprietorship, partnership and corporation) even if a law does not recognize a business
and its owner as the separate business.

Important of business entity concept

The business entity concept of accounting is of great importance because of the following
reasons:

1. The business entity concept is essential to separately measure the performance of a

particular business in terms of profitability and cash flows etc.
2. It helps in assessing the financial position of each and every business separately on a
particular date.
3. It becomes difficult and impossible to audit the records of a business if they are
intermingled with those of different entities/individuals.
4. The concept ensures that each and every business entity is taxed separately.

Going Concern Concept

The going concern concept of accounting implies that the business entity will continue its
operations in the future and will not liquidate or be forced to discontinue operations due to any
reason. A company is a going concern if no evidence is available to believe that it will or will
have to cease its operations in foreseeable future. A going concern is a business that is assumed
will meet its financial obligations when they fall due. It functions without the threat
of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months
or the specified accounting period.
Going concern is an important part of the generally accepted accounting principles. Without it,
businesses would not be able to performance or accrued or prepaid expenses. The going concern
principle allows a business to defer some of their prepaid expenses to future accounting periods,
rather than recognizing them all at once.
Money Measurement concept
The money measurement concept states that a business should only record an accounting
transaction if it can be expressed in terms of money. This means that the focus of accounting
transactions is on quantitative information, rather than on qualitative information. This
principle also assumes the unit of measure is stable; that is, changes in its general purchasing
power are not considered sufficiently important to require adjustments to the basic financial
statements. The inflation which occurs over the passage of time is not considered. only those are
consider which can be measured in the term of money or which are financial in nature.
Thus, a large number of items are never reflected in a company's accounting records, which
means that they never appear in its financial statements. Examples of items that cannot be
recorded as accounting transactions because they cannot be expressed in terms of money
include:

 Employee skill level

 Employee working conditions

 Expected resale value of a patent

 Value of an in-house brand

 Product durability

 The quality of customer support or field service

 The efficiency of administrative processes

Accounting Period Concept

An accounting period is an established range of time during which accounting functions are
performed, aggregated, and analyzed including a calendar year or fiscal year. The accounting
period is useful in investing because potential shareholders analyze a company’s performance
through its financial statements that are based on a fixed accounting period. This concept
requires that the life of business should be segregated into equal parts which are termed
as Accounting Periods. This concept requires consistency of accounting periods.

 An accounting period is a period of time that covers certain accounting functions, which
can be either a calendar or fiscal year, but also a week, month, or quarter, etc. 
 Accounting periods are created for reporting and analyzing purposes, and the accrual
method of accounting allows for consistent reporting. 
  The matching principle states that expenses should be reported in the accounting period
in which the expense was incurred, and all revenue earned as a result of that expense be
reported in the same accounting period.

Matching Concept
The matching concept is an accounting practice whereby firms recognize revenues and their related
expenses in the same accounting period. Firms report "revenues," that is, along with the "expenses"
that brought them. The purpose of the matching concept is to avoid misstating earnings for a period.
The business entities follow this concept mainly to ascertain the true profit or loss during an
accounting period. This leads to either overcasting or under casting of the profit or loss, which may
not reveal the true efficiency of the business and its activities in the concerned accounting period.
Matching concept of accounting further implies that the revenues are recognized when they are
earned and expenses are accounted for when they are incurred or benefits are received from these
expenses, rather than when the related receipt or payment of cash takes palace.

In other words, expenses shouldn't be recorded when they are paid. Expenses should be recorded
as the corresponding revenues are recorded. This matches the revenues and expenses in a period.
In this sense, the matching principle recognizes expenses as the revenue recognition principle
recognizes income.

Dual Aspect Concept

The dual aspect concept states that every business transaction requires recordation in two
different accounts. This concept is the basis of double entry accounting, which is required
by all accounting frameworks in order to produce reliable financial statements. Every
transaction of a firm is recorded in two different accounts. This relates to double entry
bookkeeping. That means dual aspects concept tells every transaction affects the business in at
least two aspects which are equal and opposite in nature.
In a single -entry system, only one side of transaction are made. For example, if a sale is made to
the customer only sale revenue is recorded, other side is not recorded (receipt/credit to the
customer is not recorded). But, in double entry, both sale revenue and receipt/credit to the
customer are recorded. The concept is derived from the accounting equation, which states
that:
Assets = Liabilities + Equity
If management wants to have its financials audited, it must accept the dual aspect concept
and maintain its accounting records using double-entry accounting.
Cost Concept
The cost concept of accounting states that all acquisition of items (such as assets or things
needed for expending) should be recorded and retained in books at cost. Thus, if a balance
sheet shows an asset at a certain value it should be assumed that this is its cost unless it is
categorically stated otherwise. The cost principle requires that assets be recorded at the cash
amount (or the equivalent) at the time that an asset is acquired. Further, the amount recorded will
not be increased for inflation or improvements in market value.
The term ‘cost’ is most widely used as the ‘money cost’ of production which relates to
the money expenditure of a firm on:
 Wages and salaries paid to the labor
 Payment incurred on machinery and equipment
 Payments for rent and insurance.
 Payment for materials, power, light, fuel, transportation etc

Realization Concept

The realization principle is the concept that revenue can only be recognized once the
underlying goods or services associated with the revenue have been delivered or rendered,
respectively. Thus, revenue can only be recognized after it has been earned. Realization
concept in accounting, also known as revenue recognition principle, refers to the application
of accruals concept towards the recognition of revenue (income). Under this principle, revenue is
recognized by the seller when it is earned irrespective of whether cash from the transaction has
been received or not. The best way to understand the realization principle is through the
following examples:

 Advance payment for goods

 Advance payment for services
 Delayed payments.
 Multiple deliveries.

The realization principle is most often violated when a company wants to accelerate the
recognition of revenue, and so books revenues in advance of all related earning activities being
completed.
Generally Accepted Accounting Principles (GAAP)
Generally accepted accounting principles (GAAP) refer to a common set of accounting
principles, standards, and procedures issued by the Financial Accounting Standards Board.
Public companies in the United States must follow GAAP when their accountants compile their
financial statements. GAAP is a combination of authoritative standards (set by policy boards)
and the commonly accepted ways of recording and reporting accounting information. GAAP
aims to improve the clarity, consistency, and comparability of the communication of financial
information. GAAP helps govern the world of accounting according to general rules and
guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used

in accounting across all industries. Attempts to standardize and regulate the definitions,
assumptions, and methods used in accounting across all industries.

GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.

GAAP is short for Generally Accepted Accounting Principles. GAAP is a cluster of
accounting standards and common industry usage that have been developed over many
years. It is used by organizations to properly organize their financial information into
accounting records, summarize the accounting records into financial statements; and
disclose certain supporting information. For all organizations, GAAP is based on established
concepts, objectives, standards and conventions that have evolved over time to guide how
financial statements are prepared and presented. For companies or not-for-profits, GAAP is set
with the objective of providing information that is useful to investors, lenders, or others that
provide or may potentially provide resource

One of the reasons for using GAAP is so that anyone reading the financial statements of
multiple companies has a reasonable basis for comparison, since all companies using GAAP
have created their financial statements using the same set of rules. GAAP includes principles
on:

 Recognition—what items should be recognized in the financial statements (for example

as assets, liabilities, revenues, and expenses
  Measurement—what amounts should be reported for each of the elements included in
financial statements

 Presentation—what line items, subtotals and totals should be displayed in the financial
statements and how might items be aggregated within the financial statements
 Disclosure—what specific information is most important to the users of the financial
statements. Disclosures both supplement and explain amounts in the statements.

These 10 general concepts can help you remember the main mission of GAAP:

1.) Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2.) Principle of Consistency

Accountants commit to applying the same standards throughout the reporting process, from one
period to the next, to ensure financial comparability between periods. Accountants are expected
to fully disclose and explain the reasons behind any changed or updated standards in
the footnotes to the financial statements.

3.) Principle of Sincerity

The accountant strives to provide an accurate and impartial depiction of a company’s financial
situation.

4.) Principle of Permanence of Methods

The procedures used in financial reporting should be consistent, allowing comparison of the
company's financial information.

5.) Principle of Non-Compensation

Both negatives and positives should be reported with full transparency and without the
expectation of debt compensation.

6.) Principle of Prudence

Emphasizing fact-based financial data representation that is not clouded by speculation.

7.) Principle of Continuity

While valuing assets, it should be assumed the business will continue to operate.

8.) Principle of Periodicity

Entries should be distributed across the appropriate periods of time. For example, revenue should
be reported in its relevant accounting period.

9.) Principle of Materiality

Accountants must strive to fully disclose all financial data and accounting information in
financial reports.

10.) Principle of Utmost Good Faith

Derived from the Latin phrase within the insurance industry. It presupposes that parties remain
honest in all transactions.

GAAP Attempts to standardize and regulate the definitions, assumptions, and methods used in
accounting across all industries and Helps govern the world of accounting according to general
rules and guidelines.

BUSINESS CASE:

Q.NO.1 What is the ethical dilemma for the accounting clerk?

An ethical dilemma (ethical paradox or moral dilemma) is a problem in the decision-making

process between two possible options, neither of which is absolutely acceptable from an ethical
perspective. Although we face many ethical and moral problems in our lives, most of them come
with relatively straightforward solutions.

Accounting clerk is newly hired employee just 3 months before so trying to provide some
knowledge about the entries that the Long -term investment have maturity period more than five
years so can’t be posted in short term investment but chief financial officer is not hearing and
threating to fired from the job so, accounting clerk is unable to determine the optimal solution to
such dilemmas.

In the case, the accounting clerk have the ethical dilemma about the job whether to work or
resign the job, where the chief financial officer, the person who interviewed and hired forced to
do unethical work related to job. Accounting clerk is so needy of the job as to pay for student
loan. Due to the job able to pay loan and reduce certain personal problems. As ethics refers to
doing what is right but unable to do right entries due to the order of chief financial officer. Also,
such situation creates physically and mentally pressure and toucher to the accounting clerk.
Q.NO.2 In a short response (minimum 75 words), discuss how you would respond to the
situation.

In order to solve ethical problems, companies and organizations should develop strict ethical

standards for their employees. Every company must demonstrate its concerns regarding the
ethical norms within the organization. In addition, companies may provide ethical training for
their employees. As:

 Identify the ethical issues: First find out the issues, what are their causes and who is liable
to that ethical issues

 Identify alternative courses of action: After that what are the alternatives solution how
can that issues can be handled properly

 Using ethical reasoning to decide on a course of action: Now the final step is taking the
decision about the situation weather to informed the higher level or handle by self.

In this case as a accounting clerk I would not obey the chief financial officer as all the entries
and data should be disclosed to the head office or in the organization so it must be correct and
accurate. If the financial officer forced me to do such unethical work than I will informed to the
higher level and the further decision will be taken from higher level of the organization or the
team.