ACCOUNTING CONCEPTS AND

ASSUMPTIONS

Accounting concepts and

assumptions are the
essential GUIDELINES under
which businesses prepare
their financial statements

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 ACCOUNTING CONCEPTS
AND ASSUMPTIONS

They are the BASIC

ASSUMPTIONS, RULES AND
PRINCIPLES which work as the
basis for recording of business
transactions and preparation
of accounts.

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 THE GOING CONCERN CONCEPT

This assumes that the business WILL

CONTINUE IN OPERATIONAL
EXISTENCE FOR THE FORESEEABLE
FUTURE.
This means that all the accounts and
statements should be prepared on the
assumption that the enterprise has
NEITHER THE INTENTION NOR
NECESSITY to liquidate or curtail
significantly the scale of operation.

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 THE ACCRUALS
CONCEPT
This assumes THAT REVENUE AND
COSTS ARE ACCRUED, MATCHED
WITH ONE ANOTHER so far as their
relationship can be established.
Revenue and profits dealt with in the
Income Statement are matched with
the associated costs and expenses by
including in the same account the
costs incurred in earning them.

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 THE CONSISTENCY CONCEPT

This assumes that THERE

IS CONSISTENCY OF
ACCOUNTING TREATMENT
OF LIKE ITEMS within each
accounting period and
from one period to the
next.

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 THE CONSISTENCY
CONCEPT
In other words, companies
shouldn’t use one
accounting method today,
use another tomorrow, and
switch back the day after
that.

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 THE CONSISTENCY
CONCEPT

For Example: If Buildings is

depreciated using Straight Line
Method in one year, in
subsequent years, the same
method should be applied
unless the company can
demonstrate that the new
method is better than the old
method.
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 THE PRUDENCE CONCEPT

This assumes that REVENUES AND

PROFITS ARE NOT ANTICIPATED,
but are recognized by inclusion in
the Income Statement only WHEN
REALIZED IN THE FORM OF CASH
OR OTHER ASSETS , the ultimate
cash realization of which can be
assessed with reasonable
certainty.

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 THE PRUDENCE
CONCEPT
PROVISION IS MADE FOR ALL KNOWN
LIABILITIES, EXPENSES AND LOSSES,
whether the amount is known with
certainty or is a best estimate in the light
of the information available.
In Brief:
. THE PRUDENCE CONCEPT TAKES INTO
ACCOUNT:
ALL FUTURE LOSSES, BUT NOT FUTURE
PROFITS

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 BUSINESS ENTITY CONCEPT

This concept assumes that, for

accounting purposes, the BUSINESS
ENTERPRISE AND ITS OWNERS are
two separate independent entities.
Thus, the business and personal
transactions of its owner are
separate. For example, when the
owner invests money in the business,
it is recorded as liability of the
business to the owner.

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 BUSINESS ENTITY
CONCEPT
Similarly, when the. owner
takes away from business
cash/goods for his/her
personal use, it is not treated
as a business expense

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 BUSINESS ENTITY
CONCEPT
Thus the accounting records
are made in books from the
point of view of the business
and not the person owning
the business.
This concept is the very
basis of Accounting

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 MONEY MEASUREMENT
CONCEPT
This concept assumes that only those
business transactions that can measured in
terms of money is recorded.
In Botswana, such transactions are
expressed in Pula. Thus, as per the money
measurement concept, only transactions
which can be expressed in terms of money
are recorded in the books of accounts
E.g. A payment of rent P500 is recorded as it
is expressed in Pula.

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 MONEY MEASUREMENT
CONCEPT
This also means that
transactions which cannot
be expressed in monetary
terms are not recorded in
Books of Account.

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 MONEY MEASUREMENT
CONCEPT
E.g. Sincerity, Loyalty, honesty of
Employees, Quality of goods
bought for the purpose of sale
etc. are not recorded in the
Books of Account as they cannot
be measured in terms of money,
although they do affect the
profits or losses of the business.

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ACCOUNTING PERIOD (TIME
INTERVAL ) CONCEPT
All the transactions are
recorded in the books of
accounts on the assumption
that profits on these
transactions are to be
ascertained for a specified
accounting period.

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 ACCOUNTING PERIOD (TIME
INTERVAL ) CONCEPT
Thus, this concept requires
that the Income Statement
and Statement of Financial
Position should be prepared
at regular intervals

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 ACCOUNTING PERIOD (TIME
INTERVAL ) CONCEPT
This is necessary for different
purposes like:
calculation of profit,
ascertainment of financial position,
tax computation etc.
Further, this concept assumes that,
indefinite life of business is divided
into parts.

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 ACCOUNTING PERIOD (TIME
INTERVAL ) CONCEPT
These parts are known as
Accounting Period.
It may be of one year, six months,
three months, one month, etc.
But usually one year is taken as
one accounting period which may
be a calendar year or a financial
year.

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 THE HISTORICAL COST
CONCEPT

The concept states that all assets

are recorded in the book of
accounts at their Cost price, which
includes cost of acquisition,
transportation and installation and
Not at its market price.

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 THE HISTORICAL COST
CONCEPT
It means that Non-Current
Assets like Building,
Furniture and Fixtures etc.
are recorded in the Books of
Account at the price paid for
them.

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 THE DUAL ASPECT CONCEPT

Dual aspect is the foundation

or basic principle of
accounting.
It provides the very basis for
recording business
transactions in the book of
account.

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 THE DUAL ASPECT
CONCEPT
This concept assumes that
every transaction has a dual
effect, i.e. it affects two
accounts in opposite
directions.

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 THE DUAL ASPECT
CONCEPT
Thus, the duality concept is
commonly expressed in terms of
fundamental accounting equation:
Assets = Liabilities + Capital
The above accounting equation states
that the assets of a business are
always equal to the claims of
owner/owners and the outsiders.

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