Accounting Concepts and Assumptions:

Accounting concepts are basic assumptions on the basis of which financial

statements of a business are prepared. Accounting assumptions are broad concepts that
develop GAAP (Generally Accepted Accounting Principles) upon which all the
accounting is based.

1. Cost Concept:
According to this concept, “every business transaction is recorded in the book of
accounts at original cost price”. (Recorded with present value & not any future
value)
Ex: The machinery

2. Money Measurement Concept:

According to this concept, “every business transaction is recorded in books of
accounts must be measured in terms of money”.
Ex: Quarterly production, Sales, Wages etc.,

3. Business Entity Concept (Entity Concept)

According to this concept, “separates the entity of the owner from the business
transactions.”.

4. Realization Concept: (Revenue recognition concept)

According to this concept,” When is the revenue is recorded to be earned on the
date it is realized”.

5. Historical records Concept:

According to this concept, “businesses have to record an asset on their balance
sheet for the amount paid for the asset”.

6. Going Concern Concept

According to this concept, it is assumed that the business will run for long time &
accounting also be made for long time. The concept basically helps to determine long-
term or short-term expenses and liabilities.

7. Matching Concept
According to this concept, “we have to match the income of a certain period
with expenses of that period only”. (Cost of asset = cost of Liabilities)

8. Accounting Period Concept:

According to this concept,” Profit & Loss A/c prepared for a period of 1 year”.

9. Dual Aspects Concept (Duality principle)

According to this concept, every transaction there must be two aspects, a debit &
credit of equal amounts
10. Accrual Concept
According to this concept, the expenses and revenues that have been
incurred or earned during the month, but will be paid or received in the future has
to be recorded in the books of accounts

11. Objectivity concept:

According to this concept, accounts should be show true & fare positions of
business. It should not be influence and bias by others.

Main Conventions of Accounting

A. Accounting of full disclosure:

According to this Convention, “Entries are made in such a way, that they provide
honestly all information relating to the activities of the business”.

B. Convention of materially:
According to this convention, “All material information, must be recorded”.

C. Convention of Conservatism or Prudence concept

The Prudence concept requires prepares of accounts to anticipate all income

D. Consistency Concept:
According to this convention, methods adopted in accounting should be remain
same from one year to another year. They should not be change year to year