ACCOUNTING CONCEPTS - Accounts and Finance for Managers

The following are the most important concepts of accounting:

  • Money Measurement concept
  • Business Entity concept
  • Going Concern concept
  • Matching concept
  • Accounting Period concept
  • Duality or Double Entry concept
  • Cost concept

Money Measurement Concept

This is the concept tunes the system of accounting as fruitful in recording the transactions and events of the enterprise only in terms of money. The money is used as well as expressed as a denominator of the business events and transactions. The transactions which are not in the expression of monetary terms cannot be registered in the book of accounts as transactions.

For e.g. 5 machines, 1 ton of raw materials, 6 fork lift trucks, 10 lorries and so on. The early mentioned items are not expressed in terms of money instead they are illustrated only in numbers. The worth of the items are getting differed from one to another. To record the above enlisted items in the book of accounts, all the assets should be converted in to money. For e.g. 5 lathe machines worth Rs 1,00,000; 1 ton of raw materials worth amounted Rs. 15,00,000 and so on.

The transactions which are not in financial in character cannot be entered in the book of accounts.

Business Entity Concept

This concept treats the owner as totally a different entity from the business. To put in to nutshell "Owner is different and Business is different". The capital which is brought inside the firm by the owner, at the commencement of the firm is known as capital. The amount of the capital, which was initially invested should be returned to the owner considered as due to the owner; who was nothing but the contributory of the capital.
For e.g. Mr Z has brought a capital of Rs.1 lakh for the commencement of retailing business of refrigerators. The brought capital of Rs. 1 lakh has utilized for the purchase of refrigerators from the Godrej Ltd. He finally bought 10 different sized refrigerators. Out of 10 refrigerators, one was taken away by the owner Mr.

Business Entity Concept

In the angle of the firm

The amount of the capital Rs.1 lakh has to be returned to the owner Mr. Z, which considered to be as due. Among the 10 newly bought refrigerators for trading, one was taken away by the owner for his personal usage. The one refrigerator drawn by the owner for his personal usage led the firm to sell only 9 refrigerators. It means that Rs. 90,000 out of Rs. 1 Lakh is the volume of real capital and the Rs.10,000 worth of the refrigerator considered to be as drawings; which illustrates the capital owed by the firm is only Rs. 90,000 not Rs. 1 lakh.

In the angle of the owner

The refrigerator drawn worth of Rs.10,000 nothing but Rs.10,000 worth of real capital of the firm was taken for personal use as drawings reduced the total volume of the capital of the firm from Rs.1 lakh to Rs. 90,000, which expected the firm to return the capital due amounted Rs. 90,000.

Going Concern Concept

The concept deals with the quality of long lasting status of the business enterprise irrespective of the owners' status, whether he is alive or not. This concept is known as concept of long-term assets. The fixed assets are bought in the intention to earn profits during the season of the business. The assets which are idle during the slack season of the business retained for future usage, in spite of that those assets are frequently sold out by the firm immediately after the utility leads to mean that those assets are not fixed assets but tradable assets. The fixed assets are retained by the firm even after the usage is only due to the principle of long lastingness of the business enterprise. If the business disposes the assets immediately after the current usage by not considering the future utility of the assets in the firm which will not distinguish in between the long-term assets and short-term assets known as tradable in categories.

Matching Concept

This concept only makes the entire accounting system as meaningful to determine the volume of earnings or losses of the firm at every level of transaction; which is an outcome of matching in between the revenues and expenses.

The worth of the transaction is identified through matching of revenues which are mainly generated from the sales volume and the expenses of the firm at every level.

For example, the cost of goods sold and selling price of the pen of ABC Ltd are Rs. 5 and Rs. 10 respectively. The firm produced 100 ball pens during the first shift and out of 100 pens manufactured 20 pens are considered to be damage which cannot be supplied to the customers, rejected by the quality circle department. There was an order from the firm XYZ Ltd., which amounted 80 pens to be supplied immediately.

The worth of the transaction of the firm at every level of the transaction is being studied only through the matching of revenues with the expenses.
At first instance, the firm produced 100 pens which incurred the total cost of Rs 500 required to match with the expected revenues of Rs 1,000; illustrated the level of profit how much would it accrue if the entire level of production is sold out ?

If the entire production capacity is sold out in the market the profit level would be Rs 500.

Out of the 100 pens manufactured 20 were identified not ideal for supply as damages, the remaining 80 pens were supplied to the individual retailer The retailer has been dispatched 80 pens amounted Rs 400 which equated to Rs 800 of the expected sales At the moment of dispatching, the firm expected to earn a profit of Rs 400 at the level of 80 pens supplied.
After the dispatch, the retailer found that 50 pens are in accordance with the order placement but the remaining are to the tune of the retailers' specifications. Finally, the retailer has agreed to make the payment of the bill only in accordance with the order placed which amounted Rs 500 out of the expenses of the manufacturer Rs 250.

This concept facilitates to identify the worth of the transaction at every moment.

Accounting Period Concept

Though the life period of the business is longer in span, which is classified into the operating periods which are smaller in duration. The accounting period may be either calendar year of Jan-Dec or fiscal year of April-Mar. The operating periods are not Concept of fusion in between the expenses and revenues
Owner and business organizations are two separate entities Accounting concept for long lastingness of the business enterprise 15 equivalent among the trading firms, which means that the operating period of one firm Financial Accounting may be shorter than the other one. The ultimate aim of the concept is to nullify the deviations of the operating periods of various traders in the trading practice.

According to the Companies Act, 1956, the accounting period should not exceed more than 15 months.

Duality or Double entry accounting concept

It is the only concept which portrays the two sides of a single transaction. The law of entire business revolves around only on mutual agreement sharing policy among the players. How mutual agreement is taking place ?

The entire principle of business is mainly conducted on mutual agreement among the parties from one occasion to another. The payment of wages are only made by the firm out of the services of labourers. What kind of mutual agreement in sharing the benefits is taking place? The services of the labourers are availed by the firm through the payment of wages. Like-wise, the labourers are regularly getting wages for their services in the firm.
Payment of Wages = Labourers' service

In the angle of accounting aspects of a firm, the labourer services are availed through the payment of wages nothing but the mutual sharing of benefits. Availing of services or taking the services of the labourers only through the cash payment whatever you make at the end i.e., giving wages.

This is being denominated into two different facets of accounting viz Debit and Credit. Every debit transaction is appropriately equated with the transaction of credit.

The entire above sample of transactions are being carried out by the firm through the raising of financial resources. The resources raised were finally deployed in terms of assets. It means that the total funds raised by the firm is equated to the total investments.

From the below table illustration, it is clearly evidenced that the entire raised financial resources are applied in the form of asset applications. It means that the total liabilities are equivalent to the total assets of the firm.


Cost Concept

It is the concept closely relevant with the going concern concept. Under this concept, the transactions are recorded only in terms of cost rather than in market value. Fixed assets are only entered in terms of the purchase price which is a original cost of the asset at the moment of purchase. The depreciation is deducted from the original value which is the initial purchase price of the asset will highlight the book value of the asset at the end of the accounting period. The marketing value of the asset should not be taken into consideration, Why? The main reason is that the market value of the asset is subject to fluctuations due to demand and supply forces. The entry of market value of the asset will require the frequent update of information to the tune of changes in the market. Will it be possible to record the changes taken place in the market then and there? This is not only not possible for regular updating of information but also leads to lot of consequences. Though the firm is ready to register the market value; which market value has to be taken into consideration? The market value can be bifurcated into two categories viz Realizable value and Replacement value.

Realizable value is the value of the asset at the moment of sale or realization. Replacement value is the another value which considered at the moment of replacing the old asset with the new one. These two cannot be the same at single point of time and the wear and tear of the asset will play pivotal role in fixing the realization value which has the demarcation over the later.

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