1)Following are widely accepted
(1) Separate Entity Concept or Entity Concept or business entity
Business Entity Concept considered business enterprises as a Separate
Entity & having separate identity distinct from its owner. Therefore
business transactions are recorded in the books of accounts from business point
of view and not from the owner. Therefore amount invested by owner into the
business is also treated as liability(internal) for business.
(2) Money Measurement Concept
According to this concept, only those transactions which can be expressed
in money should be recorded in the books of accounts . Transactions and events,
that cannot be expressed in money are not recorded in books of accounts, even
if they are very useful or affect the result of business.
(3) Periodicity Concept/Accounting period concept
According to this concept, the life of an enterprise is broken into
smaller periods so that its performance can be measured at regular interval.
Generally one year period is taken up for performance measurement and appraisal
of financial position. So life of the enterprise is divided into smaller
periods(usually one year) which is termed as ‘accounting period.’ At the end of
accounting period, we prepare financial statements.
Periodicity Concept helps
in numbers of ways
(1) Compare financial statements
of different periods.
(2) Uniform and consistent
accounting treatment for ascertaining profit or loss and assets of the
(3) Match periodic revenues with
expenses for getting correct results of business.
(4) Accrual Concept
Accrual means recognition of revenue and expenses as they are earned or
incurred and not when cash or money is received or paid. Revenue means gross
inflow of cash, receivables and other consideration arises in the ordinary
course of business activities from sale of goods, rendering services and using
other enterprises resources yielding interest, royalties and dividends.
Expenses are cost relating to revenue earned for a particular period
( 5 ) Matching Concept: For ascertaining profit
and loss for a particular period, expenses should be matched with revenue of
that period. In financial statement, it is necessary to match revenue of the
period with the expenses of that period to determine correct profit or loss.
(6) Going Concern Concept :
According to this concept, it is assumed that enterprise will continue
its operation for indefinite period of time. It is assumed that an enterprise
neither has intention nor the need to liquidate or wind up and curtail its
scale of operation. It is because of this concept a distinction is made between
assets and expense, fixed and current assets / liabilities.
Concept/Historical cost concept:
According to this concept, value of asset is determined on the basis of
historical cost or acquisition cost or price paid for acquisition of asset.
It has following
- In an inflationary situation
when price of all commodities go up on an average, acquisition cost loses its
- Historical cost-based accounts
may lose comparability.
- Many assets do not have
acquisition cost like Human Resources.
(8) Conservatism/ prudence
It states that accountant should not anticipate income but should provide
for all possible losses. Where there are many alternative value of asset an
accountant should choose method which shows lesser value. Conservatism
essentially leads to understandability of income and wealth and should be the
basis for the preparation of financial statements.
(9) Consistency :
- The accounting policies are followed consistently from one period to
another to achieve comparability of financial statements from one period to
-The concept of consistency is applied where different methods of accounting
are equally acceptable. For e.g.:- A company may adopt any depreciation method,
straight line method, WDV method etc, similarly there are many methods for
valuation of stocks in hand. But the company should follow the principal of
consistency over years.
An enterprise should
change its accounting policy in any of the following circumstances only.
Bringing books of accounts in accordance with the issued
(ii) To compliance with provision of law.
When it is felt that new method will reflect more true and
fair picture in the financial statement .
(10) Materiality : -
refers to the relative importance of an item or event. According to American
Accounting Association, “ an item should be regarded as material if there is
reason to believe that knowledge of it would influence the decision of an
informed investor. Thus whether an amount is material or not, will depend on
its amount, nature, size of business and level of person taking decision.
- It is an exception of
full disclosure principal. As per this principle the items effecting
significantly on the business of enterprises should be only disclosed
separately in the financial statements.
11. full disclosures principles:-
- each and every item
should be properly disclosed in preparation of financial statements.
Fundamental Accounting assumptions(FAA) :- There are three
fundamental accounting assumptions: (a)
When nothing is written
about the fundamental accounting assumptions in the financial statements then
it is assumed that these accounting assumptions have been followed in
preparation of financial statements. It should be specifically disclosed if any
of these assumption is not followed.