BASIC CONCEPTS OF ACCOUNTING!!!

Meta Description: This article explains the basics of accounting and is perfect for people who want to understand more about financial statements.

WHAT IS ACCOUNTING?

• Accounting can be defined as the Language of any Business.

• Proper accounting of day-to-day affairs of a business, aids in preparation of accurate financial information which leads to correct decision making by various stakeholders.

• Preparation of Financial Information by all entities should be performed uniformly and consistently over a period. This need led to the emergence of certain Accounting Principles called “Generally Accepted Accounting Principles” (GAAP).

WHAT IS GAAP?

GAAPs are certain set of concepts, principles, rules, conventions, which are developed and to be followed for preparation of any financial information.

ACCOUNTING CONCEPTS

1. ENTITY CONCEPT:

• States that the business has a separate identity apart from its owner, i.e., business transactions are recorded in the business books of accounts and owner’s personal transactions are recorded in the owner’s books of accounts.

• This principle of distinguishing business transactions and owner’s transactions led to the emergence of “Double Entry Bookkeeping”.

2. MONEY MEASUREMENT CONCEPT:

• Only those transactions which are measurable in terms of money should be recorded.

• Any type of transaction even if it affects the business drastically, are not recorded if they are not convertible into monetary terms.

3. PERIODICTY CONCEPT:

• Accounts should be prepared after the end of every period and not at the end of the life of an entity.

• Usually, this period is one calendar year. We generally follow 01st April – 31st March of the next year as one accounting period.

4. ACCRUAL CONCEPT:

• The effects of transactions are recorded on Mercantile Basis i.e., as, and when they occur and not when cash or cash equivalent is received or paid.

• Financial Statements prepared on accrual basis provides users information not only about the past and present cash obligations and of the future obligations also.

• For Example, Mr. X started a cloth merchandise. He invested Rs.50,000/- bought stock worth Rs.50,000/- and sold it for Rs. 65,000/- to a customer Mr. Y. Now, Mr. Y pays him Rs. 35,000/- immediately and assures to pay Rs.30,000/- shortly. Now, total income for Mr. X is Rs. 65,000/- only where he should account Rs. 30,000/- as income receivable and Rs. 35,000/- as income received.

5. MATCHING CONCEPT:

• This concept is based on the earlier concept of Accrual Basis, which states that all expenses should be matched with revenue of that period. In other words, revenue should be recognized by considering all expenses incurred to earn that revenue.

6. GOING CONCERN CONCEPT:

• Also known as the Concept of Indefinite Accounting Period, this concept assumes that any entity has an indefinite lifetime. “Owners may come, and Owners may go, but company will go on forever”!!

• It is assumed that entity will continue to operate for a foreseeable future and neither has the intention to wind up nor to curtail its operations.

7. DUAL ASPECT CONCEPT:

This is the core concept of Double Entry Bookkeeping. Every Transaction or event has 2 aspects:

1. Increase in one asset and decrease in another asset.

2. Increase in one asset and increase in one liability.

3. Decrease in one asset and increase in another asset.

4. Decrease in one asset and decrease in one liability.

5. Increase in one liability and decrease in another liability.

6. Increase in one liability and increase in one asset.

7. Decrease in one liability and increase in another liability.

8. Decrease in one liability and decrease in one asset.