Accounting is a business language, which is used to communicate financial information to the company’s stakeholders, regarding the performance, profitability and position of the enterprise and help them in rational decision making. The financial statement is based on various concepts and conventions. Accounting concepts are the fundamental accounting assumptions that act as a foundation for recording business transactions and preparation of final accounts
Definition of Accounting Concept
Accounting Concepts can be understood as the basic accounting assumption, which acts as a foundation for the preparation of the financial statement of an enterprise. Indeed, these form a basis for formulating the accounting principles, methods and procedures, to record and present the financial transactions of the business.
These concepts provide an integrated structure and rational approach to the accounting process. Every financial transaction that occurs is interpreted taking into consideration the accounting concepts, which guide the accounting methods.
- Business Entity Concept: The concept assumes that the business enterprise is independent of its owners.
- Money Measurement Concept: As per this concept, only those transactions which can be expressed in monetary terms are recorded in the books of accounts.
- Cost concept: This concept holds that all the assets of the enterprise are recorded in the accounts at their purchase price
- Going Concern Concept: The concept assumes that the business will have a perpetual succession, i.e. it will continue its operations for an indefinite period.
- Dual Aspect Concept: It is the primary rule of accounting, which states that every transaction affects two accounts.
- Realization Concept: As per this concept, revenue should be recorded by the firm only when it is realized.
- Accrual Concept: The concept states that revenue is to be recognized when they become receivable, while expenses should be recognized when they become due for payment.
- Periodicity Concept: The concept says that a financial statement should be prepared for every period, i.e. at the end of the financial year.
- Matching Concept: The concept holds that, the revenue for the period, should match the expenses.
Definition of Accounting Convention
Accounting Conventions, as the name suggest are the practice adopted by an enterprise over a period of time, that rely on the general agreement between the accounting bodies and help in assisting the accountant at the time of preparation of financial statement of the company.
To improve the quality of financial information, the accountancy bodies of the world may modify or change any accounting convention. Given below are the basic accounting conventions:
- Consistency: Financial statements can be compared only when the accounting policies are followed consistently by the firm over the period. However, changes can be made only in special circumstances.
- Disclosure: This principle states that the financial statement should be prepared in such a way that it fairly discloses all the material information to the users, to help them in taking a rational decision.
- Conservatism: This convention states that the firm should not anticipate incomes and gains, but provide for all expenses and losses.
- Materiality: This concept is an exception to the full disclosure convention which states that only those items to be disclosed in the financial statement which has a significant economic effect.