What is Accounting Concepts?

Accounting concepts are the basic rules, assumptions, and conditions that define the parameters and constraints within which the accounting operates. In other words, accounting concepts are the generally accepted accounting principles, which form the fundamental basis of preparation of universal form of financial statements consistently.

Objectives of Accounting Concepts

The main objective is to achieve uniformity and consistency in the preparation and maintenance of financial statements.
It acts as the underlying principle, which assists accountants in the preparation and maintenance of the business records.
It aims to achieve a common understanding of rules or assumptions to be followed by all types of entities, thereby facilitating comprehensive and comparable financial information.

Top 12 Accounting Concepts

Below mentioned are the generally accepted accounting concepts used widely around the world.

#1 – Entity Concept

Entity concept is a concept which explains to you that your business is different than you. It tells you that the business owner and the owner are two separate entities. The statute recognizes the entity as an artificial person. The entity is required to prepare its own set of financial statements and record its business transactions accordingly.

#2 – Money Measurement Concept

Money Measurement concept states that only those transactions are recorded and measured in monetary terms. In simple words, only financial transactions are recorded in books of accounts.

#3 – Periodicity Concept

Periodicity concept states that the entity or the business needs to carry out the accounting for a definite period, usually the financial year. The period for drawing of financial statements can vary from monthly to quarterly to annually. It helps in identifying any changes occurring over different periods.

#4 – Accrual Concept

According to Accrual Accounting, the transaction is recorded on a mercantile basis. In other words, transactions are to be recorded as and when they occur, not as and when the cash is received or paid, and for the period to which the transaction pertains.

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#5 – Matching Concept

The matching concept is linked to the Periodicity concept and Accrual concept. The matching concept states that the period for which revenue has been considered, the entity needs to account for expenses only relating to that period. It means that the entity has to record revenue and expenses for the same period.

#6 – Going Concern Concept

Going concern concept is an assumption that the business will be carried on an ongoing basis. Thus, the books of accounts for the entity are prepared such that the business will be carried on for years to come.

#7 – Cost Concept

Cost concept states that any asset that the entity records shall be recorded at historical cost value, i.e., the acquisition cost of the asset.

#8 – Realization Concept

This concept is related to the cost concept. The realization concept states that the entity should record an asset at cost until and unless the realizable value of the asset has been realized. Practically, it will be correct to say that the entity will record the realized value of the asset once the asset has been sold or disposed of off, as the case may be.

#9 – Dual Aspect Concept

This concept is the backbone of the double-entry bookkeeping system. It states that every transaction has two aspects, debit and credit. The entity has to record every transaction and give effect to both the elements of debit and credit.

#10 – Conservatism

This conservatism concept states that the entity needs to prepare and maintain its book of accounts on a prudent basis. Conservatism says that the entity has to provide for any expected losses or expenses; however, it does not recognize future revenue expected.

#11 – Consistency

The accounting policies are followed consistently to achieve the intention of comparing the financial statements of various periods or for that matter of multiple entities.

#12 – Materiality

The materiality concept explains that the financial statements should show all the items having a significant economic effect on the business. It allows ignoring the other concepts if the item to be disclosed is having an insignificant impact on the business of the entity, and the efforts involved in recording the same is not worthwhile.

Importance of Accounting Concept

The importance of the accounting concept is visible in the fact that its application is involved at each and every step of a recording a financial transaction of the entity.
Following the generally accepted accounting concepts helps in saving time, efforts, and energy of the accountants, as the framework is already set.
It improves the quality of financial statements and reports with respect to understandability, reliability, relevance, and comparability of such financial statements and reports.