This article throws light upon the top seven concepts of accounting. The concepts are: 1. The Money Measurement Concept 2. The Business Entity Concept 3. The Ongoing Concern Concept 4. The Cost Concept 5. The Dual Aspect Concept 6. The Accrued Concept 7. The Realisation Concept.
Concept # 1. The Money Measurement Concept:
The record is important in terms of money because those who read the accounting statement, therefore, must necessarily go behind the figures and try to judge for themselves as to what sort of management the undertaking has.
Concept # 2. The Business Entity Concept:
In accounting language business and proprietors are two different things, for example, capital is provided by the proprietor it is shown as firm has received money and owing it to the proprietor.
Concept # 3. The Ongoing Concern Concept:
The long run of the business is assumed so transaction are recorded in such a manner that the benefit likely to accrue in future from the money spent now, or the future consequences of the events occurring now are also taken into consideration.
However, when the life of the undertaking is limited the record will be made accordingly, for example, if the asset is purchased, it should depreciate fully within the limited period in accounting although it may lost longer.
Concept # 4. The Cost Concept:
Despite the fact that an asset purchased may be of higher value but the actual amount paid enters into the accounting. Some points to be noted are: Cost concept does not present certain estimates to be made and the record to be based upon these estimates e.g., an asset depreciates it would be the number of years of life which will be estimated.
Secondly, the cost concept presents the accounting estimates from reflecting the correct position if there has been a change in the price, for example, if land purchased long ago on a price the current price gets inflated but the accounting will be based on the original price.
Concept # 5. The Dual Aspect Concept:
As the relation between proprietor and the firm i.e., the firm owes to proprietor the capital involved. Further, if the firm borrows some money the value of assets will increase but this will not mean increase in owner’s equity the following will show this statement:
Owner’s equity or capital + claim of outsiders = assets. It is a firm principle of law that outsider’s claim are first to be cleared, thus the equation will be:
Assets – Outsider’s claim = Owner’s equity.
Therefore, there cannot be any transaction or event without a double effect, the effect being either an increase or decrease in the asset and to have an effect on outsider’s equity or claim or owner’s equity or capital. The dual aspect will enable us to develop all the rules which are required for a proper record of the transaction of a firm.
Concept # 6. The Accrued Concept:
The owner’s equity can increase be an increase in the asset without having a claim for outsiders. Also with an increase in the capital, or through earning of profit in the trade. From the above emerges the concept of income and expenditure, that is, an increase in the owner’s equity is income, and vice versa.
The expenses or losses are: by payment of interest, depreciation, claim from outsider. The incomes are by earning commission. When profit is earned from manufacture or sale of goods this is an ordinary course of business but if an asset is used for a long time and is sold as profit or liability is settled at lower value resulting in profit is an extraordinary earning and is called capital, but profit earned ordinarily is called revenue.
Concept # 7. The Realisation Concept:
In case of recording profit it is not put into account as profit till the supposed higher value is realised in cash, on the other hand if there is likely a reduction in value before sale it is recorded as loss.