Accounting concepts are ideas, assumptions and conditions based on which a business entity records its financial transactions and organises its bookkeeping. It helps a business interpret and integrate a financial transaction into the accounting process.
There are several accounting concepts that are important to understand:
Entity concept: This concept states that the business entity should be considered separate from its owners.
Money measurement concept: This concept states that only transactions that can be measured in monetary terms should be recorded in the financial statements.
Going concern concept: This concept assumes that the business will continue to operate indefinitely.
Cost concept: This concept states that assets should be recorded at their historical cost, rather than their current market value.
Dual aspect concept: This concept states that every transaction has two aspects: a debit and a credit.
Accruals concept: This concept states that revenues and expenses should be recognized in the financial statements when they are earned or incurred, rather than when the cash is received or paid.
Consistency concept: This concept states that accounting policies and procedures should be consistent from one period to the next.
Materiality concept: This concept states that only items that are material in nature should be included in the financial statements.
Conservatism concept: This concept states that when in doubt, accountants should choose the method that results in lower profits or asset values, in order to avoid overstating financial results.
