Accounting concepts and conventions

Concepts:

• Business entity concept states owner and business are two different entities in the eye of law
• Money measurement concept states only financial transactions need to be recorded in the books of accounts.
• Going concern concept states that business will continue to operate for an indefinite period of  time
• Cost concept states assets will be recorded in the books at cost price though it’s market value will change with passage of time.
• Dual Aspect concept states that every transaction has two fold effects and double entry system of book keeping has to be followed while recording the transactions.
• Periodicity concept states the whole life of business is divided into different accounting periods say for example one year period to facilitate preparation of financial statements.
• Matching concept states expenses relating to particular period are to be matched with revenues relating to that period.
• Realisation concept which states that revenue is recognized to be earned on the date on which it is realized.
•  Objective evidence concept states that every transaction should be supported by a reliable evidence to avoid frauds.
• According to accrual concept, the effects of the transactions are recognised on mercantile basis, i.e., when they occur and not when cash is paid or received.

Conventions:

• Convention of consistency states that accounting rules and procedures should be  followed consistently  year after  year to facilitate comparison.
• Convention of full disclosure implies that the accounts must be prepared honestly and all material information should be disclosed in the accounting statement.
• Convention of materiality states that all material transactions have to be disclosed in financial statements.  Whether a transaction is material or immaterial depends according to size of the organization.
• Convention of conservatism states  – provide for probable losses though not for probable gains.